Ethereum has burned $12.7 billion since the London hard fork. But it could slow down – DL News

• It’s been 1,000 days since Ethereum started charging transaction fees.
• But the mechanism that compensates for new tokens issued on the network is slowing down.
• More efficient transactions, an explosion of activity on Layer 2 networks, and the recent Dencun upgrade have all helped reduce the amount of Ether burned by the network.

With the implementation of an upgrade known as EIP-1559 as part of the London hard fork in August 2021, Ethereum became the first blockchain to begin burning a portion of the fees users spend for transactions.

It was 1,000 days ago.

The move, blockchain faithful hoped, would help offset the issuance of new Ether tokens on the network, creating a more sustainable monetary policy.

And it worked. Over the next 1,000 days, Ethereum users burned some 4.3 million etherworth over $12.7 billion just from using the network.

When Ethereum reduced its Ether emissions by moving to a proof-of-stake consensus mechanism in September 2022, the network became deflationary, meaning that more Ether was, on average, burned by the network than no new Ether has been issued.

But in recent months, the rate at which Ethereum burns tokens has slowed.

A combination of more efficient transactions, an explosion of activity on layer 2 networks, and the recent Dencun upgrade have all helped to reduce transaction fees – and therefore the amount of Ether burned by the network.

Lower fees are great for users. But if Ethereum fails to attract enough activity to offset the decline, it could easily lose its deflationary status, potentially calling its business model into question.

Join the community to receive our latest stories and updates

Why is the burn slowing down?

When Ethereum users transact on the network, they must pay fees denominated in Ether.

These fees are made up of two parts: so-called base fees charged by the network and priority fees, paid to block builders to encourage them to process the transaction more quickly. Ethereum burns base fees and gives priority fees to those who process transactions.

When activity on Ethereum increases, the network automatically increases the base fees that users must pay.

Average base fees on Ethereum need to stay above 23 gwei these days to ensure the network burns enough ether through transaction fees to keep it deflationary. Gwei is a measure of small amounts of ether.

Over the past 1,000 days, gas costs have averaged 41 gwei. If this trend continues, Ethereum supply is expected to decrease by 0.76% over the coming year.

But there are reasons to believe that this is not the case.

Ethereum’s March 13 Dencun upgrade introduced a new feature that reduced the fees that Ethereum Layer 2 had to pay to submit transactions to the Ethereum mainnet by up to 98%.

Since Dencun, Ethereum transaction fees have fallen from an average of 58 gwei on March 13 to just 7 gwei on May 2.

Additionally, more users are moving from Ethereum to Layer 2 networks – separate blockchains built on top of Ethereum that rely on it for security.

After reaching an all-time high of over 11 million weekly transactions in 2021, transactions on Ethereum slowly declined to around 8 million per week by the end of March.

At the same time, weekly transactions on Arbitrum and Optimism, the two largest Layer 2s, climbed to a combined figure. 18.5 million.

With fewer users transacting on Ethereum, the demand for transactions – and therefore the fees paid on the network – decreases.

Increased gas efficiency

Code improvements that reduce the amount of data that smart contracts on Ethereum must handle are also expected to reduce fees in the coming months.

For example, decentralized exchange Uniswap, the most frequently used Ethereum DeFi protocol on which users have spent over $1.4 billion in transaction fees, has included several optimizations for its upcoming release Uniswap v4.

V4 should improve gas efficiency between swaps and liquidity operations, as well as reducing the cost of creating new liquidity pools by 99%.

Future versions of other major Ethereum protocols will likely also be optimized for transaction fees.

Tim Craig is a DeFi correspondent at DL News. Do you have any advice? Send him an email to tim@dlnews.com.

Fuente