According to a report by crypto data analytics company IntoTheBlock, Ethereum is likely transitioning towards a new regime characterized by low network revenue from fees, testing the deflationary supply hypothesis for its native token ether (ETH).According to IntoTheBlock data, network fee revenue for the Ethereum blockchain has fallen to its lowest point since April 2020 and is down 90% from its May high.
During the bull market for Ethereum over the last few years, people bemoaned the high gas prices (transaction charges) and network clogging caused by the rise in non-fungible token (NFT) trading and decentralized finance (DeFi) yield farming.Those times are over as cryptocurrency prices have plunged, NFT demand has crashed, and DeFi activity has drastically decreased.
According to the paper, the growth of layer 2s, which were created to help Ethereum expand and enhance its capacity, has also helped to lower fees.While the change benefits Ethereum users, who can now complete transactions at a lower cost than previously, it has an adverse effect on the amount of ETH in circulation by maintaining an inflationary balance by preventing fresh token issuance.
“The decrease in fees is putting ETH’s ‘ultra sound money’ thesis to a test,” said Lucas Outumuro, IntoTheBlock’s head of research.
Due to the lack of activity on the blockchain during the last 30 days, the ETH token supply has increased by 33,500 ETH, or almost $52 million.Outumuro predicted that network fee revenue will likely remain low as consumers continue to migrate to tier 2s and speculative activity dries up.For instance, NFT trading accounted for the majority of tokens burned in 2021 and the beginning of 2022, but only 8% last week, he claimed in the study.
“The low fee regime represents a major transition for Ethereum, trading off high revenues and deflationary supply for the promise to be able to attract mainstream users through layer 2s,” he added.