Ethereum Faces Inflationary Pressure: Is the Era of Ultra-Fast Money Over?
Leading cryptocurrency analyst Thor Hartvigsen recently highlighted this issue in a lengthy post on X, discussing the current state of Ethereum’s fee generation and supply dynamics.
Ethereum (ETH), considered an ultra-strong currency due to its deflationary bidding method, appears to be facing new challenges that have some analysts questioning whether this narrative still holds.
ETH No Longer Ultrasonic Money?
Hartvigsen noted that August 2024 is “on track to be the worst month in terms of fees generated on the Ethereum main network since the beginning of 2020.” The decline is largely due to Layer 2 (L2) solutions avoiding paying significant fees to Ethereum and ETH holders, thanks to the introduction of blobs in March.
Consequently, much activity has shifted from the core network to these layer two (L2) solutions, with most value being captured by the L2s themselves at the execution layer. This means that new ETH is being issued at a faster rate than it is being consumed by transaction fees.
Hartvigsen revealed the impact on non-stakers and stakers: According to the analyst, non-stakers mainly benefit from Ethereum’s burn mechanism, which burns base and blob fees, reducing the overall supply of ETH. With blob fees often at $0 and base fee generation declining, non-stakers benefit less from burns.
Simultaneously, priority fees and miners’ extractable value (MEV), which are not burned but distributed to validators and stakers, do not directly benefit non-stakers.
Furthermore, ETH issues flowing to validators/stakers have an inflationary effect on supply, which has a negative effect on non-stakers. Thus, especially after the introduction of blobs, the net flow to non-stakers has become inflationary. For stakers, the situation is somewhat different.
Hartvigsen showed that the net impact of ETH issuance is neutral for stakers, as they capture all fees, either through the burn or through the staking yield. Despite this, the amount of commissions received by the broker has dropped by over 90% since the start of the year.
The sustainability of Ethereum’s ultra-sound money narrative is questioned by this decline. To answer this, Hartvigsen stated that “Ethereum no longer has the ultrasonic money narrative, which is probably for the better.
What’s Next for Ethereum?
So far, it’s pretty obvious that Ethereum’s ultra-solid cash narrative isn’t as compelling as it once was. With interest rates on the decline and inflation slightly outpacing spending, Ethereum is now more comparable to other Layer 1 (L1) blockchains such as Solana and Avalanche, which are also facing similar inflationary pressures, according to Hartvigsen.
Hartvigsen notes that although Ethereum’s current net inflation rate of 0.7% a year is still significantly lower than other L1s, the diminishing profitability of infrastructure layers like Ethereum may require a new approach to maintain the network’s value proposition.
The analyst discusses increasing the fees L2s pay to Ethereum as a possible solution, although this could be competitive. At the end of the publication, Hartvigsen noted the following:
“When we zoom out, infrastructure layers are generally not profitable (study Celestia, which generates about $100 in revenue per day), especially when we consider inflation as a cost. Ethereum is no longer an outlier with a deflationary net supply and, like other infrastructure layers, requires a different form of valuation.”
By Leonardo Perez