Ethereum is likely entering a new regime dominated by low network revenue from fees, testing the deflationary supply narrative of its native token Ether (ETH), crypto data analytics firm IntoTheBlock said in a report.
According to data from IntoTheBlock, Ethereum blockchain revenue from network fees has fallen to its lowest level since April 2020 and is 90% below its peak in May.
Ethereum users have complained about high transaction costs – also known as gas fees – during the bull market of the past few years, while the network is prone to congestion due to increasing activity from non-fungible token (NFT) trading and yield farming in decentralized finance (DeFi). was. Those days are over as cryptocurrency prices collapsed, demand for NFTs collapsed, and DeFi activity collapsed.
The proliferation of Layer 2 systems designed to help Ethereum scale and increase its capacity has also helped reduce fees, the report said. While the development is positive for Ethereum users as they will be able to transact more cheaply than before, it impacts the ETH supply by perpetuating inflation by burning fewer tokens than through new issuances.
“The reduction in fees puts ETH’s ‘ultra-sound money’ thesis to the test,” said Lucas Outumuro, head of research at IntoTheBlock.
Outumuro said network fee revenues are likely to remain low as speculative activity subsides and users continue to migrate to Layer 2. For example, NFT trading accounted for the majority of tokens burned in 2021 and early 2022, but last week it was only 8%, he said in the report.
“The low-fee system represents a major transition for Ethereum, trading high revenue and deflationary supply for the promise of attracting mainstream users via Layer 2,” he added.
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