Ethereum will no longer reap deflation benefits as Dencun upgrade takes effect

Earlier this year, Ethereum experienced a major update called the Dencun upgrade, merging the Cancun and Deneb updates. This update aimed to enhance Ethereum’s performance by increasing its capacity and reducing transaction costs.

However, one recent effect of this upgrade, identified by the on-chain data company CryptoQuant, is the shift from Ethereum being a deflationary digital asset to an inflationary one.

Ethereum’s Dencun upgrade

According to CryptoQuant, the Dencun upgrade has turned Ethereum back into an inflationary token. This is because fewer transaction fees are burned on the Ethereum network, keeping the total supply of ETH from dropping enough to make it deflationary.

When more transaction fees are burned (usually when there’s a lot of activity on the network), the total supply of ETH goes down, making it deflationary. But this isn’t currently happening due to the Dencun upgrade.

Take a look at this week's analysis.
Ethereum: The Death of “Ultra Sound” Money.

We argue that:
The Dencun upgrade has made ETH inflationary again, potentially killing the narrative of “Ultra sound” money as a structurally lower amount of transaction fees burned have had the… pic.twitter.com/TE84Exf5fT

— Julio Moreno (@jjcmoreno) May 8, 2024

Prior to the Dencun upgrade, when there was more network activity, more fees were burned, leading to a decrease in ETH supply. However, after the Dencun upgrade, this changed. Even with significant network activity, the total fees burned no longer depended on it.

As Julio Moreno, CryptoQuant’s Head of Research, observed, the Dencun upgrade brought about a downward structural change in the Ethereum network. This is visible in the significant drop in the median transaction fee and, consequently, in the fees burned.

The Dencun upgrade decreased the transaction fees users had to pay and also reduced the total amount of fees burned. This increased the overall supply of ETH, moving it away from its previously deflationary status. Because of this, the number of fees burned dropped to its lowest since the Merge Upgrade in September 2022.

Also, due to decreased burned fees, the rate at which new ETH is being created is now the fastest since the Merge upgrade. The Ethereum network has shifted from deflationary to inflationary based on its current activity rate.

Ethereum’s bearish trends analyzed

Ethereum’s price has been following Bitcoin’s recent trend. Since Bitcoin’s value is decreasing, Ethereum’s price is also dropping.

However, Ethereum seems to have more negative factors than Bitcoin. This makes cryptocurrency analysts believe that Ethereum, the second-largest cryptocurrency by market capitalization, will continue to lose value.

Crypto expert Shin Forex posted an insightful Ethereum price analysis on the TradingView website. His focus was on the ETH/BTC chart, where he highlighted some worrisome trends in the ETH price.

The expert has noted that Ethereum’s popularity seems to be waning. Instead of showing interest in alternative coins like ETH, investors are gravitating towards Bitcoin. This shift suggests that Ethereum isn’t attracting much investor attention, removing the support it previously enjoyed.

The ratio of Ethereum’s value to Bitcoin’s—the ETH/BTC pair—has dropped under its support mark of 0.05. This descent below the acknowledged value is considered significant because there’s a trend whenever this happens. The expert parallels two situations in 2016 and 2019 where Ethereum’s value dropped below its support level relative to Bitcoin.

Whenever this situation has occurred in the past, the price has typically plummeted before it has a chance to bounce back. The crypto expert predicts a similar outcome this time and suggests that ETH/BTC will dip below 0.04. Ethereum’s value could drastically drop if this happens, with a possible target price set at around $2,500.

The cryptocurrency analyst notes that Ethereum’s price isn’t particularly impressive right now, as it is decreasing within its current pattern. However, a broader view of the situation might give us insight into how Ethereum’s price might recover after the crash.

The Ethereum market is predominantly bearish, and the price has fallen below $3,000. It’s currently valued at $2,975, showing a slight decrease of 0.36% over the past day, per Coinmarketcap information.