The Dencun Dilemma: Can Lower Fees Derail Ethereum's Deflationary Ambitions And Dampen Prospects Of A Price Surge?

While the much-touted Dencun Upgrade reduced the cost of using Ethereum’s ETH/USD Layer-2 solutions, it also rendered Ethereum inflationary, raising concerns about its price impact. 

What Happened: Ethereum's total supply surged to its highest level in more than two months, according to Julio Moreno, Head of Research at analytics firm CryptoQuant. He attributed the steady increase to the Dencun Upgrade, which was executed in mid-March.

"The Dencun upgrade had the effect of lowering transaction fees, but also made ETH inflationary again," Moreno stated. "ETH will need 3x-4x more network activity to be deflationary again."

The technical update resulted in a sharp drop in fees charged on Ethereum scaling solutions, including Arbitrum ARB/USD and Polygon MATIC/USD. 

However, because Ethereum and its Layer-2 solutions burn a portion of transaction fees, the upgrade resulted in a significant reduction in Ethereum burned, which is the supply that gets permanently removed from circulation.

Why It Matters:  As per the fundamentals of scarcity economics, a steady drop in the supply of an asset could lead to its value appreciation, provided demand catches up. 

Much of the cryptocurrency market, including bellwether Bitcoin BTC/USD, has aggressively marketed its deflationary character to attract investors from mainstream markets.

Ethereum, too, has broadly remained deflationary in recent years, witnessing a 0.205 drop in supply since The Merge, according to ultra sound money.

However, the Dencun Upgrade has slowed down the deflation rate, with a 0.584% increase over the past 30 days. 

The supply increase could concern Ethereum investors as they look for bullish catalysts in a market that has slackened over the past month or so.

Price Action: At the time of writing, Ethereum was trading at $2,933.43, following a 0.25% gain in the last 24 hours, according to data from Benzinga Pro. The second-largest cryptocurrency was down nearly 6% over the month.

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