The Ethereum Dencun Upgrade: Potential Impact on Ether Supply and Price
The Ethereum Dencun upgrade introduces “blobspace,” reducing gas usage and the Ether burn rate. This significant change could impact Ethereum’s supply dynamics and market price, as reduced deflationary pressure and increased network activity shape its future value.
Ethereum, the leading smart contract platform, is on the brink of a major update known as the Dencun upgrade. This significant development could have profound implications for the supply of Ether (ETH), Ethereum’s native cryptocurrency, and consequently, its market price.
Since the Ethereum (ETH) network's historic Shanghai update, Ether's supply has decreased by more than 309,500 coins since September last year.
According to data from Ultra Sound Money, with the transition to the Proof of Stake consensus, around 1.195 million ETH was burned.
The burn rate is about 30% higher compared to the approximately 885,000 ETH issued by the network as staking rewards during the same period.
The current supply of ETH is 56,000 ETH lower than its last peak of around 120.27 million on October 31.
This represents an 18% decrease in Ethereum supply over the past six weeks since the Shanghai update.
The recent surge in ETH burned can be attributed to increased on-chain trading, driven in particular by the growing adoption of trading bots.
Uniswap transactions are the largest contributor to ETH burned in the last 30 days, accounting for around 10% of the total ETH destroyed.
Importantly, prominent public trading bots such as Maestro and Banana Gun are among the most burned assets on the network, together burning around 9% of the ETH removed from circulation last month.
How the Shanghai Update Made Ethereum Deflationary The Shanghai update, also known as The Merge, aimed to make Ethereum a deflationary network by replacing PoW miners and restructuring tokenomics.
The update made the network deflationary through the burning of underlying transaction fees, significantly reducing the release of new Ether.
Following the Shanghai update, Ethereum showed the potential for deflationary behavior, with supply reaching almost 120.534 million ETH nearly three weeks later.
The burn rate accelerated in early 2023, decreasing by about 276,500 ETH between February 1 and June 8.
Although the burn rate slowed in the third quarter, ETH supply continued to decline until reaching a post-Merge low of around 120.2 million ETH on August 31, effectively offsetting inflation of 307,370 ETH.
In September and October, Ether supply became inflationary for the first time in 2023, adding around 53,700 coins to the ETH supply.
Still, Ethereum's on-chain activity experienced a resurgence in November, driven by bull market conditions, and saw a significant acceleration in the burn rate.
As reported, the recent bull run led to a surge in DeFi volumes and the rapid movement of institutional funds into digital asset products.
Overall, the total value locked (TVL) on DeFi platforms increased by 11% over the last 30 days, with Solana (SOL) recording a 56% increase.
This year, Solana has been identified as an institutional investor favorite after weeks of record inflows even at low altcoin numbers.
Altcoin leader Ethereum has also seen a surge in institutional inflows in recent weeks, pushing its price above the $2,000 level.
Optimism and Avalanche recorded gains of 17% and 16% respectively on DeFi TVL.
NFT volumes experienced a turnaround from falling volumes in previous months. Last month, NFT volumes totaled $0.91 billion, recording a 200% growth.
What is the Dencun Upgrade
The Dencun upgrade on the Ethereum network introduces a new transaction mechanism, “blobspace,” aimed at replacing the current transactional calldata system for Layer 2 transactions. This innovative approach is expected to significantly reduce gas usage, impacting the way transactions are processed on the Ethereum blockchain.
The Impact on Ether Burn Mechanism
A key feature of this upgrade is its potential to reduce the Ether burn rate. Presently, Ether used for base gas fees is burned, contributing to Ethereum’s deflationary mechanism. The reduction in gas usage due to blobspace could decrease the amount of Ether being burned, altering the supply dynamics of Ethereum’s native cryptocurrency.
Potential Price Implications
The Dencun upgrade’s influence on the Ether burn mechanism might affect Ethereum’s market price. A decrease in Ether burning may reduce deflationary pressure, which could have short-term and long-term effects on Ethereum’s valuation. Over time, increased network efficiency and user activity, driven by lower transaction fees, may positively impact Ethereum’s market value.
