Ethereum fees are at their lowest level in two years. This has happened ahead of a much-anticipated event known as the Merge, which is widely seen to be driving up the price of its cryptocurrency, ether (ETH).
The average cost for a transaction is under 12.5 gwei, a unit of account that represents a fraction of an ETH used to measure the gas (or transaction fees) needed to run Ethereum. That’s less than half the gwei needed to use Ethereum at the end of July.
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This is good news for Ethereum users, who have long and rightfully complained about the network’s fees. However, there are fewer users around to benefit. Costs are down because demand is, too.
Despite declining use, Ethereum itself is increasingly seen as a bullish bet. Developers have formalized a timeline to transition the network to proof-of-stake (PoS) next month, which will radically change its cost structure – making it theoretically more efficient and cheaper to use.
See also: The 'Merge Trade' Has Begun, Experts Say
There are some who also anticipate Ethereum’s transition could make the network deflationary – in that it might eventually burn more tokens than it prints, thereby increasing the value of any ETH you hold. Right now, no one knows Ethereum’s total supply, which is not fixed like Bitcoin’s.
But there’s a wrinkle, as The Defiant’s Samual Haig noted. Declining on-chain use means the network is burning fewer tokens. He brings this up to cast doubt on the “deflationary narrative” that might, in part, be influencing buyers.
Indeed, there’s a large contingent of Ethereum boosters who say that ether is “ultra-sound money.” Not only is it the currency to power the “world computer,” but also an investment to rival BTC’s “digital gold.” Others, like the CoinList exchange, are less kool-aidy, but still think the Merge is “a fundamental, structural change” that will likely make Ethereum deflationary.
Last year, to lower network costs, Ethereum developers released EIP-1559 (those letters stand for Ethereum Improvement Proposal), which introduced a burning mechanism to take ether out of circulation. This operates by burning a portion of transaction fees, and adjusts based on block space and on-chain activity.
Since EIP-1559, Ethereum indeed has recorded deflationary days and even weeks. This is usually correlated with market rallies, or sometimes bizarrely successful non-fungible token (NFT) mints. Some 58,000 ETH (worth about $160 million at the time) were burned after Yuga Labs’ Otherdeeds sale, the most active NFT launch to date, Haig noted.
But Ethereum has burned only about 7,500 ETH over the past week – the lowest level yet – due to declining on-chain use. Haig reported that if this trend continues, the network would not be deflationary post-Merge. (Estimates vary, but it's expected that 1,649 ETH will come into circulation under PoS.)
“Demand for block space must increase by roughly one-third from current levels in order for the burn rate to keep pace with post-merge ether issuance,” Haig wrote Aug. 8.
That’s not to say Ethereum will never be deflationary, but if you zoom out on the chart today’s low fees/usage appear to be the steady state of a blockchain running outside of a bull run. From the network’s founding in 2017 to the middle of 2020, network fees generally kept below 20 gwei.
That was until Compound kick-started the yield-farming palooza that was known as “DeFi Summer.” Average transaction fees spiked to over 700 gwei then, the highest ever, and have been trending down ever since. Curiously, the 2017-2018 bull run – which accelerated PoS development on Ethereum after CryptoKitties clogged the chain – is hardly represented.
Historic network fees are not a perfect proxy for actual use, especially considering how many changes have been implemented to Ethereum’s issuance and cost structures over the years. Further, it’s entirely unknown how the network’s transition will influence demand. Costs will come down, but as we see today that’s not enough for people to rush to perform transactions.
Perhaps the network will flood with people who were curious about crypto but did not want to use it due to concerns over its carbon footprint.
See also: Is the Ethereum 'Merge' Driving This Rally? | Opinion
For now, all we can note is that the cost to use Ethereum today is approaching the average price during bear markets. If that means post-Merge Ethereum will be as deflationary as it is today (that’s to say, sporadically, based on demand), then so be it. But now is as good a time to buy a CryptoKittie, if you were priced out last time.
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