Ethereum, the second-largest cryptocurrency by market value, is experiencing a notable change in its supply dynamics. This shift is attributed to a significant drop in gas fees on the Ethereum network.
Prices have recently hit their lowest levels since 2023, resulting in more Ethereum (ETH) being created than destroyed. As a consequence, the network is now showing signs of slight inflation.
With lower gas prices in effect, there’s a reduction in the burning of ETH and an increase in its creation. Ultrasound.money, a website that tracks Ethereum’s supply and burn rate, reveals that Ethereum has been experiencing inflation for the past seven days, resulting in a net creation of 4,271 ETH.
Nonetheless, when viewed annually, Ethereum maintains its deflationary nature, with a net destruction of 157,489 ETH.
The alteration in Ethereum’s supply dynamics is a direct outcome of the implementation of EIP-1559 in August 2021.
This upgrade introduced a mechanism that burns transaction fees, directly tying the supply of ETH to the fluctuations in gas prices.
When gas prices rise, more ETH is burned, and conversely, when they drop, less ETH is destroyed. The change paved the way for Ethereum’s transition from a proof-of-work to a proof-of-stake consensus mechanism, famously known as the “merge.”
This shift drastically reduced the rate of new ETH creation, essentially turning Ethereum into a deflationary asset often referred to as “ultrasound money.”
Julio Barragan, the director of education at Blocknative, a Web3 tool that lets users price, preview, and monitor transactions, thinks the gas situation is only momentary.
He told Decrypt that “as soon as volume picks back up, so will competition for block space, and the network will automatically adjust gas prices accordingly.”
These fluctuations detected in Ethereum’s supply dynamics hold significant implications for its price and overall value proposition such as making Ethereum more accessible and cost-effective for users and developers, allowing them to interact with various applications and protocols on the network without incurring high fees.
Conversely, reduced gas prices may reduce the perceived scarcity and demand for ETH, potentially exerting downward pressure on its price.
