Ethereum Shifts from Deflation to Inflation Post-DenCun Upgrade

Following Ethereum's DenCun upgrade on March 13, which drastically reduced transaction costs on the Layer 2 network, the cryptocurrency has transitioned from a deflationary to an inflationary trend. This significant upgrade, celebrated as one of the most impactful in Ethereum's history, has had unforeseen consequences for the network's economics.

With the decrease in user fees post-upgrade, the Ethereum network is now burning ETH at a much slower rate than before, leading to an increase in the circulating supply of ETH. CryptoQuant's recent report highlights this shift, indicating a rapid daily growth rate in ETH supply since the completion of the DenCun upgrade.

The supply of ETH

YCharts data confirms the gradual decline in ETH supply following the upgrade, with an uptick observed from April 13 onwards, bringing the total supply to 120 million coins. Notably, ultrason.money data reveals that Ethereum has burned 488,000 ETH in the last 30 days, lower than the newly issued 913,000 ETH, resulting in a positive inflation rate of 0.353%.

Since the merge in September 2022, Ethereum's consensus mechanism transitioned from Proof of Work to Proof of Stake, significantly reducing the issuance rate of new ETH. This change initially transformed ETH into a deflationary currency, earning it the moniker "Ultrasound money" in contrast to Bitcoin's "Sound Money" due to its fixed supply. However, with the recent increase in ETH supply outpacing burning, this advantage is dissipating.

Furthermore, CryptoQuant's analysis reveals a disconnect between transaction fees and network activity post-DenCun upgrade. Previously, transaction fees were positively correlated with network activity, leading to a reduction in ETH supply. However, despite increased network activity, transaction fees remain subdued, decoupling total burning costs from network activity.

The conclusion of the report is:

Given the current network activity speed, Ethereum is unlikely to experience deflation again, and the narrative of Ether as Ultrasound money may have vanished or requires higher network activity to revive.

In conclusion, Ethereum's transition to inflation post-DenCun upgrade suggests a departure from its previous deflationary narrative. The notion of Ether as "Ultrasound money" may need higher network activity to regain prominence or risk fading altogether amidst the current economic landscape.