CryptoQuant Analysis: Dencun Upgrade’s Impact on Ethereum’s “Ultra Sound Money” Status

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As a seasoned crypto investor with a deep understanding of the Ethereum blockchain and its intricacies, I am closely monitoring the developments surrounding the Dencun upgrade. While the long-term scalability improvements are promising, the unintended consequence of potentially reversing ETH‘s deflationary trend has piqued my interest.

As a researcher studying the Ethereum blockchain, I’ve observed firsthand the persistent struggle with scalability issues. During peak usage, network congestion causes sluggish transaction speeds and sky-high gas fees, negatively impacting user experience and limiting the number of applications the network can support. The much-anticipated Denver upgrade, implemented in March 2024, represented a crucial advancement in solving these challenges. It introduced groundbreaking concepts that pave the way for a more scalable Ethereum network in the future.

Dencun, a combination of Cancun and Deneb enhancements, didn’t provide an instant cure-all for Ethereum’s issues. Yet, it marked a significant turning point in Ethereum’s evolution. The core element of Dencun was the unveiling of “proto-danksharding,” a concept that sets the stage for sharding adoption on Ethereum. Sharding refers to splitting the blockchain into smaller units, or shards, each handling transactions autonomously. This feature could potentially boost Ethereum’s transaction capacity substantially. Although Dencun itself doesn’t implement sharding, it prepares the groundwork for its future incorporation.

As a long-term crypto investor in Ethereum, I acknowledge that Dencun’s upgrade aimed for scalability as a primary goal. However, its effect on transaction fees in the short term was subtler. Contrary to popular belief, this update did not directly cut down fees on the main Ethereum network. Instead, it concentrated on enhancing fee efficiency within Layer 2 networks.

Dencun’s integration of EIP-4844 in Ethereum significantly cuts down the expenses for Layer 2 networks when sending their grouped transactions back to the primary Ethereum chain. This enhancement could lead to potential fee savings for users employing these Layer 2 services, although the actual reduction might not match initial estimates. Keep in mind that a comprehensive evaluation is necessary to determine the eventual effect on fees.

The unexpected outcome of the Dencun upgrade was less Ethereum being burned in transactions. While this was beneficial in reducing fees, it also meant that the deflationary effect on Ethereum’s total supply caused by burned ETH was weakened. In the past, higher network activity resulted in increased fees and some of these fees were burnt, contributing to a decrease in the Ethereum supply. This mechanism was expected as a positive outcome of the Etherean Merge. However, with fewer Ethereum being burnt and the natural increase in supply continuing, Ethereum’s total supply started growing at a faster rate than before the Merge. As a result, Ethereum has moved closer to an inflationary model.

The Dencun upgrade left a complex legacy behind. It effectively tackled scalability issues and paved the way for Ethereum to process a greater number of transactions in the future. However, an unexpected outcome may have emerged: this update could undo Ethereum’s deflationary trend, sparking debates about its economic model’s future direction.

CryptoQuant, a well-known South Korean blockchain analysis firm, has conducted a new assessment following the Dencun upgrade on Ethereum. According to their evaluation, this update could substantially influence Ethereum’s journey towards becoming a “stable store of value,” a term used for a currency that preserves or enhances its worth over an extended period.

According to CryptoQuant, Ethereum’s “ultrasound money” concept signifies the blockchain’s capability to reduce its total Ether supply gradually over time. This reduction is facilitated by significant upgrades like EIP-1559 and The Merge. EIP-1559 introduces a mechanism that burns a portion of transaction fees, whereas The Merge implements a proof-of-stake consensus algorithm. As a result, Ethereum’s deflationary economic model is strengthened by these innovations.

As an analyst, I’ve observed a noteworthy change post-Dencun upgrade in the Ethereum network. Specifically, there’s been a disconnect between Ethereum’s transaction fees and network activity levels. This decoupling has resulted in lower transaction costs for users, but it poses a challenge to the deflationary mechanism established through The Merge.

CryptoQuant points out that while lower transaction fees on Ethereum are good for user experience and network efficiency, they can also lead to inflationary pressures within the Ethereum system. This change could have implications for ETH‘s future value as a deflationary asset and might influence its appeal in the long run.

As a crypto investor, I’ve noticed that the Ethereum network’s Denver upgrade has led to an increase in Ether ($ETH) inflation. This development has raised concerns about the long-term implications for “deflationary” or “sound money” like Ethereum, which was one of its key selling points. Let’s explore this further and discuss what it could mean for Ethereum and the broader crypto ecosystem. #EthereumUpgrade #CryptoInvesting— CryptoQuant.com (@cryptoquant_com) May 10, 2024

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2024-05-10 19:01