Is the era of ultrasound money over?

Ethereum (ETH), considered ultra-safe money due to its deflationary supply method, now appears to be facing new challenges that have led some analysts to question whether this narrative still holds up.

A prominent cryptocurrency analyst, Thor Hartvigsen, recently highlighted this issue in a detailed report. mail on X, where he discussed the current state of Ethereum fee generation and supply dynamics.

Is ETH no longer ultrasonic money?

Hartvigsen noted that August 2024 is “on track to be the worst month in terms of fees generated on the Ethereum mainnet since early 2020.” This decline is largely attributed to the introduction of blobs in March, which allowed layer 2 (L2) solutions to avoid paying significant fees for Ethereum and ETH holders.

As a result, much of the activity has shifted from the mainnet 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 roughly 0.7%, meaning that the issuance of new ETH Currently exceeds the amount that is burned through transaction fees.

Hartvigsen revealed the impact of this on non-stakers and stakers: According to the analyst, non-stakers primarily benefit from Ethereum’s burning mechanism, where base fees and blob fees are burned, reducing the overall supply of ETH.

However, as blob fees are typically $0 and base fee generation is declining, non-participants are gaining less benefit from these burns. At the same time, priority fees and miner extractable value (MEV), which are not burned but distributed between validators and participants, do not directly benefit non-participants.

Furthermore, ETH emissions flowing to validators/stakers have an inflationary effect on supply, which negatively impacts non-stakers. As a result, the net flow to non-stakers has become inflationary, especially after the introduction of blobs.

For stakers, the situation is somewhat different. Hartvigsen revealed that stakers capture all fees, either through burning or through staking yield, meaning that the net impact of ETH emissions is neutralized for them.

However, despite this advantage, stakers have also seen a significant drop in the fees they receive, down more than 90% since the beginning of this year.

This drop raises questions about the sustainability of the ultrasonic money narrative for Ethereum. To answer that, Hartvigsen stated:

Ethereum no longer has the ultra-sound money narrative, which is probably for the better.

What’s next for Ethereum?

So far, it is quite evident from current trends that Ethereum’s ultra-sound money narrative may no longer be as compelling as it once was.

With fees on the decline and inflation slightly higher than spending, Ethereum is now more Comparable to other Layer 1 (L1) blockchains Like Solana and Avalanche, which also face 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 decline Profitability of infrastructure layers Like Ethereum, a new approach may be needed to maintain the network’s value proposition.

One possible solution the analyst mentioned is to increase the fees that L2s pay to Ethereum, although this could pose competitive challenges. To conclude the post, Hartvigsen noted:

Zooming out, infrastructure layers in general are not profitable (look at Celestia, which generates about $100 in revenue daily), especially if we consider inflation as a cost. Ethereum is no longer an outlier with a deflationary net supply, and like other infrastructure layers, requires another form of valuation.

Featured image created with DALL-E, chart by TradingView