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Ethereum’s Latest Dencun Upgrade Raises Inflation Fears, Threatens Benefits of Previous Merge
- The supply of new Ether tokens is outpacing burned ETH for the first time since The Merge in 2022.
- The catalyst is Ether’s recent Dencun upgrade, which has slashed fees to a quarter of their pre-upgrade values.
- However, this has caused the amount of ETH being burned to plummet.
- Despite the change in supply tokenomics, ETH is still sitting above US$3K.
Damned if you do, damned if you don’t. That’s the current situation for Ethereum’s ecosystem, which has grappled with sky-high transaction fees since the network exploded in popularity seven years ago.
The protocol’s most recent Dencun upgrade was designed to address this issue and cut gas fees caused by network congestion. The upgrade, from that perspective, was a raging success, with tx costs slashed by 4x on average. However, there is an unfortunate downside to this – ETH has become inflationary.
Related: Ethereum Network Rebounds, Sees Massive Growth as ETH Holds Above $3K
dApps or Tokenomics? Which Metric Will Dictate ETH’s Future?
Ethereum’s 2022 upgrade – better known by its title The Merge – was a landmark moment for the blockchain. It saw Ether transition from a proof-of-work network like Bitcoin’s, to a more modern proof-of-stake protocol.
Among many of the benefits, including superior transaction speeds and lower environmental impact, was the implementation of a new burning mechanism. After every transaction, a portion of the gas fees would be burned, consistently removing some of Ether’s circulating supply.
Simply put, The Merge made ETH deflationary – a great trait for the stability of a long-term asset.
However, the new mechanism relies upon transaction costs to burn ETH. So as gas fees lower, so too does the amount of Ethereum removed from circulation. Therefore by addressing one problem, you are introducing another.
Between The Merge and the Dencun upgrade, Ethereum’s circulating supply dropped by about 400,000. Since April 2024 alone, the amount of Ether in circulation has increased by the same amount – 400,000.
Some are concerned that the reduction in fees may cause Ethereum’s status as “sound money” (a hedge against inflation) to disappear.
However, some pundits disagree, suggesting Ether never really was valuable because of its tokenomics. Rather, the important metric for Ethereum investors to watch is decentralised applications and network activity.
In that sense, perhaps lowering transaction costs – even with its downsides – will ultimately benefit the Ether ecosystem.
Time will tell.
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Author
Ben Knight
Ben Knight is a writer and editor from Melbourne with a passion for all things music and finance. He enjoys turning complex topics – especially the technical details of cryptocurrency – into digestible bites that anybody can understand. He acquired his Master’s in Writing, Editing and Publishing from RMIT in 2019 and has run his own creative writing business ever since.
