Ethereum fees hit record low after Dencun upgrade
The Most Important Points in Brief
- Ethereum transaction fees have dropped to an all-time low after the Dencun upgrade.
- The upgrade made Layer 2 solutions (L2s) significantly cheaper, leading to an increase in transactions.
- Lower fees mean less ETH is being burned, temporarily making Ethereum inflationary.
- Despite this, ETH is showing short-term positive price trends, with a rise of over 2% in the last 24 hours.
Why Have Ethereum Fees Dropped?
Following the Dencun upgrade, the Ethereum network has undergone a fundamental change. A key element of this change is the drastic reduction in transaction fees. This was made possible by the introduction of EIP-4844, an improvement that reduced the costs for Layer 2 transactions by tenfold. Layer 2 solutions, such as Optimistic Rollups and ZK-Rollups, process transactions more efficiently than the main network (Layer 1), which eases the burden on the network.
Due to the increased transactions on Layer 2, fees on the Ethereum mainnet have dropped. This is generally positive for the scalability and usage of the network, but it has also led to an unexpected side effect.
Ethereum Becomes Inflationary
A side effect of the lower fees is that less ETH is being destroyed through the so-called “burning” process. Since the introduction of EIP-1559 in August 2021, a portion of transaction fees is burned to reduce the total supply of ETH. This caused Ethereum to become temporarily deflationary, meaning more ETH was being destroyed than created.
With the current low fees, this trend has reversed, and Ethereum has temporarily become inflationary. This means that more new ETH is being created through mining or staking than is being destroyed through burning. This could potentially affect the price of ETH, as a higher supply could put downward pressure on the price.
What Does This Mean for the ETH Price?
Despite the inflationary tendency, Ethereum is showing short-term positive price signals. In the last 24 hours, the price of ETH has risen by over 2%. At the time of writing, ETH was trading at around USD 2,476.41, with a market capitalization of over USD 298 billion. More than 50% of Ethereum addresses are currently in profit, indicating a strong market position.
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A look at on-chain data also shows that ETH reserves on exchanges are decreasing. This suggests that less ETH is available for sale, increasing buying pressure, which can be seen as a bullish signal.
Technical Analysis: Where Could the Price Move?
Technical analysis shows that Ethereum is currently testing a key resistance point, the 20-day moving average (SMA). If ETH breaks through this resistance, the price could rise to USD 3,500 in the coming days. However, there are also signs of a possible correction. The MACD (Moving Average Convergence Divergence), an indicator of market trends, suggests slight weakness, which could lead to a drop to around USD 2,200.
Our Assessment
The Dencun upgrade has undoubtedly benefited Ethereum by lowering transaction costs and promoting the use of Layer 2 solutions. However, it has also caused Ethereum to become temporarily inflationary, which could influence the price trend. Despite this development, short-term price signals for ETH remain positive, and there are signs of a potential continuation of the upward trend. In the long term, it remains to be seen how the balance between supply and demand will evolve, especially regarding the impact of EIP-4844 and the further adoption of Layer 2 solutions.
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