Ethereum (ETH) is considered an ultra-healthy money due to its deflationary supply model, but it now appears to be facing new challenges. Some analysts are questioning whether this narrative still holds true.
A leading crypto analyst, Thor Hartvigsen, recently highlighted this issue in a detailed article after on X, where he discussed the current state of Ethereum’s fee generation and supply dynamics.
Is ETH no longer ultra-sound money?
Hartvigsen pointed out that August 2024 “is on track to be the worst month in terms of fees generated on the Ethereum mainnet since early 2020.” This drop is largely attributed to the introduction of blobs in March, which allowed Layer 2 (L2) solutions to bypass the payment of fees. significant costs for Ethereum and ETH holders.
This has shifted much of the activity from the main network to these layer two (L2) solutions, with most of the value being captured at the execution layer by the L2s themselves.
As a result, Ethereum has become net inflationary, with an annual inflation rate of approximately 0.7%, meaning that the issuance of new ETH currently weighs more than the amount burned on transaction fees.
Hartvigsen revealed the impact of this on Non-Stakers and Stakers: According to the analyst, non-stakers mainly benefit from Ethereum’s ‘burn’ mechanism, where base fees and blob fees are burned, reducing the total supply of ETH.
However, with blob fees often at $0 and base fee generation declining, non-stakers see less benefit from these burns. At the same time, non-stakers do not directly benefit from priority fees and Miner Extractable Value (MEV), which are not burned but distributed to validators and stakers.
Furthermore, ETH emissions flowing to validators/stakers have an inflationary effect on supply, which negatively impacts non-stakers. As a result, the net flow for non-stakers has become inflationary, especially after the introduction of blobs.
For stakers, the situation is slightly different. Hartvigsen revealed that stakers collect all fees, either through the burn or through staking yield, meaning that the net impact of ETH emissions is neutralized for them.
Despite this advantage, strikers have also seen a significant drop in compensation flowing to them, down more than 90% from the beginning of the year.
This drop raises questions about the sustainability of the ultra-sound money narrative for Ethereum. To answer that question, Hartvigsen asked
Ethereum no longer carries the ultra-sound money narrative, which is probably a good thing.
What is the future of Ethereum?
So far, it’s clear that Ethereum’s ultra-healthy financial story may not be as attractive as it once was.
With costs dropping and inflation slightly outpacing combustion, Ethereum is now more popular similar to other Layer 1 (L1) blockchains such as Solana and Avalanche, which are also facing similar inflationary pressures, Hartvigsen says.
Hartvigsen notes that while Ethereum’s current net inflation rate of 0.7% per year is still significantly lower than other L1s, the declining profitability of infrastructure layers like Ethereum, a new approach may be needed to maintain the network’s value proposition.
One possible solution the analyst discussed is to increase the fees L2s pay to Ethereum, although this could raise competitive issues. Hartvigsen concluded the post:
Zooming out, infra layers are generally unprofitable (Celestia study generates ~$100 in daily revenue), especially if inflation is seen as a cost. Ethereum is no longer an outlier with a net deflationary supply and, like other infra layers, requires a different way to be valued.
Main image created with DALL-E, chart from TradingView