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This week we dive into an overlooked trend within Ethereum. We analyze the reasons behind the remarkably low fees being generated by Ethereum, their effects on ETH's supply and their relevance towards the network's long-term future.
Network Fees - Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether
Bitcoin fees increased slightly relative to last week
Ethereum fees dropped by nearly a third in just a week, we'll be discussing this in more depth below
Exchanges Netflows - The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
Exchange flows for both Bitcoin and Ether remain relatively negligible
Ethereum Fees Reach Multi-Year Lows
Demand for Ethereum Mainnet has been slowing down over the past few months. Driven by the migration to layer 2s and the decreasing usage of applications in Mainnet, fees on Ethereum reached their lowest since April 2020.
3-Year Low -Fees on Ethereum Mainnet reached their lowest since before DeFi Summer in 2020
Last week Ethereum averaged 1.38k ETH worth of fees/day, and is currently on track for just 1.19k this week ahead of the weekend when fees usually reach their lowest
Fees are down 90% from their highs this May and approximately 50% lower than they were last October
The decrease in fees is putting ETH's "ultra sound money" thesis to a test.
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Inflationary Again - Ether's supply is slowly trending upwards
September was the first month since December 2022 where ETH's supply grew
There are two reasons behind Ether's inflationary trend: low fees and higher supply issuance
The multi-year low levels of fees on Ethereum have led to less ETH being burnt, thus decreasing the deflationary pressure
Additionally, the amount of ETH minted per day has been climbing as the amount of ETH staked continues to set new highs, leading to more inflationary rewards
Despite being technically inflationary again, Ether's net issuance for this week holds at around 0.44% annualized inflation, still 75% lower than Bitcoin's current inflation rate
As we discussed in the Q3 on-chain review, the transition of activity to layer 2s on Ethereum has been one of the main reasons behind its decreasing fees. Another reason is the dwindling volumes from NFT collections.
NFT Bear Market Impacts Fees - As NFT volumes remain lower, Ethereum loses one if its main fee contributors
In 2021 and early 2022, NFTs used to be the largest category of application burning fees on Ethereum
This week NFTs contributed to just 8% of the ETH being burnt, per ultrasound.money
With average gas fees at their lowest since September 2020, the cost of minting or trading NFTs on Ethereum Mainnet are a fraction of what they used to be; yet users don't seem to care as shown by the stagnant volume figures
As speculative activity on L1 disappears and L2s continue to grow, Ethereum fees are likely to remain low. The upcoming introduction of EIP-4844 may further accelerate this trend as it is expected to decrease L2 fees by an order of magnitude.
Ultimately, the low fee regime represents a major transition for Ethereum, trading off high revenues and deflationary supply for the promise to be able to attract mainstream users through layer 2s.
Watch The Recording
This Wednesday, we explored the Base ecosystem. Do you want to know more about the ecosystem and Base's place in the L2 landscape? Watch the recording below.
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