Ethereum Gas Fees Plunge to Five-Year Low, Rising Supply May Dampen Short-Term Price GainsA report by cryptocurrency analytics firm Kaiko Research reveals that Ethereum gas fees have recently reached a five-year low, primarily driven by increased Layer 2 activity and the March Dencun upgrade, which reduced transaction costs on Layer 2. This fee reduction has implications for ETH, as lower fees mean less ETH burned, leading to an increase in the token's supply
Ethereum Gas Fees Plunge to Five-Year Low, Rising Supply May Dampen Short-Term Price Gains
A report by cryptocurrency analytics firm Kaiko Research reveals that Ethereum gas fees have recently reached a five-year low, primarily driven by increased Layer 2 activity and the March Dencun upgrade, which reduced transaction costs on Layer 2. This fee reduction has implications for ETH, as lower fees mean less ETH burned, leading to an increase in the token's supply. As a result, Ethereum's total supply has been steadily rising since April. While demand drivers like spot ETH ETFs exist, this growing supply could potentially suppress price gains in the short term.
Beyond the declining gas fees, the rise in Ethereum's total supply is closely linked to the rapid development of Layer 2 solutions. Layer 2 solutions like Optimism and Arbitrum reduce transaction costs by executing transactions off the Ethereum main chain and only submitting the transaction results back to the main chain. This effectively shifts transaction load away from the Ethereum main chain to Layer 2, reducing gas fees. As Layer 2 solutions gain traction, more users opt for Layer 2 transactions, leading to a sustained decline in gas fees on the Ethereum main chain, resulting in less ETH burned and ultimately an increase in supply.
The Dencun upgrade further lowered transaction costs on Layer 2. The Dencun upgrade introduced EIP-4844, which separates data availability (DA) from computation on Ethereum. Simply put, this means that Layer 2s can store less data on the Ethereum main chain, thereby reducing transaction fees on Layer 2. The rollout of the Dencun upgrade has accelerated the growth of the Layer 2 ecosystem and driven more users to migrate to Layer 2, which has in turn further reduced Ethereum gas fees.
While the decline in Ethereum gas fees and the increase in supply could dampen price appreciation in the short term, this trend holds positive implications for the growth of the Ethereum ecosystem in the long run. Lower gas fees will entice more users and developers to join the Ethereum ecosystem, fueling its applications and innovation, ultimately leading to potentially larger value growth.
On a separate note, overall demand for AI tokens has sharply declined since the start of the second quarter. By early August, weekly trading volume had plunged to $2 billion, a significant drop from its multi-year high of over $13 billion in the first quarter. This could be attributed to the cooling of the AI hype and investors raising questions about the practical value of AI tokens.
Meanwhile, stablecoin FDUSD's market share reached an all-time high of 39% in late July, reversing a decline that had been ongoing for the previous three months. FDUSD's rapid growth could be attributed to its stable issuance and lower trading fees, attracting a growing number of investors and users.
BlackRock's on-chain tokenized fund, BUIDL (standing for BlackRockUSD Institutional Digital Liquidity Fund), is one of many funds launched over the last 18 months, offering investment opportunities in traditional debt instruments like U.S. Treasury bonds. It has quickly become the largest on-chain fund by assets under management (AUM). Launched in March 2024 in partnership with Securitize, the fund has attracted over $520 million in inflows so far. BUIDL's success indicates the growing interest of institutional investors in on-chain assets, and more similar funds are expected to emerge in the future.
In conclusion, the changes in Ethereum's gas fees and supply reflect the rapid development of the Layer 2 ecosystem and the positive impact of the Dencun upgrade. While it may dampen price increases in the short term, this trend will ultimately fuel the growth of the Ethereum ecosystem in the long run. The decline in demand for AI tokens and the rise of FDUSD's market share reflect the diversity of the cryptocurrency market and the competition between different types of projects. The continued focus of institutional investors like BlackRock on on-chain assets provides fresh momentum for the growth of the cryptocurrency market, signaling further innovation and applications in the future.
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