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- CryptoQuant, a cryptocurrency analysis firm, has reported a concerning development in Ethereum, the world’s second-largest cryptocurrency by market value.
- According to a report prepared by CryptoQuant, the recent Dencun upgrade has potentially weakened Ethereum’s claim to be “ultra-sound” money by reintroducing inflation to the economic model.
- The Dencun upgrade, implemented on March 13, 2024, led to a decrease in transaction fees on the Ethereum network, resulting in a reduction in the amount of ETH burned and reaching one of the lowest levels since the Merge.
Recent changes to Ethereum’s economic model have sparked discussions about its status as “ultra-sound” money, with analysts suggesting that the cryptocurrency may be returning to an inflationary state.
The Impact of the Dencun Upgrade
The Dencun upgrade was designed to reduce transaction fees on the Ethereum network, but it has also led to a decrease in the amount of ETH being burned. This has resulted in Ethereum potentially losing its claim to be “ultra-sound” money, as the reduction in burned ETH has reintroduced inflation to the cryptocurrency’s economic model. The Merge was a significant event in Ethereum’s history, marking the transition from the proof-of-work (PoW) consensus mechanism to the proof-of-stake (PoS) consensus mechanism.
Analysts’ Perspective on the Situation
Analysts explain the situation as follows: “Before the Dencun upgrade, higher network activity in Ethereum resulted in higher fees being burned, which led to a decrease in the ETH supply. However, post-Dencun, the total amount of fees burned has decoupled from network activity.” The report also emphasized that the ETH supply has reached its fastest daily increase rate since the Merge. Considering the current network activity rate, analysts believe that it is unlikely for Ethereum to return to a deflationary state. This suggests that the narrative of ETH being “ultra-sound” money could potentially be invalidated, or it would require significantly higher network activity to be revived.
Conclusion
The Dencun upgrade, while beneficial in reducing transaction fees and increasing efficiency on the Ethereum network, has led to unforeseen consequences. The decrease in ETH burned has reintroduced inflation to the economic model, potentially invalidating Ethereum’s claim to be “ultra-sound” money. This development highlights the complex interplay between technological upgrades and economic dynamics in the world of cryptocurrencies.
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