The king of altcoins, Ethereum (ETH), is facing a significant drop in the amount of ETH burned daily, especially due to a major decrease in network gas, or transaction fees, pushing the amount of burned ETH to the lowest level of the year. Currently, transaction fees on the Ethereum network are fluctuating between 5 to 10 gwei, corresponding to the lowest levels of the year.
Drop in Transaction Fees Hits ETH Burns
The decrease in transaction fees on the Ethereum network has resulted in less ETH being burned. According to on-chain data, the amount of ETH burned on May 5th was 610 ETH, indicating a record low for this year due to the minimal transaction fees. In contrast, the daily amount of ETH burned during the first four months of the year generally remained above 2,500 to 3,000 ETH.
The ongoing decrease in transaction fees on the Ethereum network is partly due to the shift in usage to Layer 2 scaling solutions, as well as the increasing adoption of blob transactions introduced in March with the Dencun update, which help reduce transaction fees on Layer 2s.
Transaction fees and ETH burning dynamics are closely watched aspects of the network’s economic model. Although lower transaction fees are beneficial for network users, the recent drop in ETH burning has a negative impact on the deflationary aspect of the altcoin king.
Everything Changed with the London Update
As known, the London update implemented in August 2021, also known as EIP-1559, fundamentally changed the fee structure of the Ethereum network. The update introduced a base transaction fee that is burned and a priority fee that acts as a tip for validators. The base transaction fee, being directly linked to network usage, means that higher transaction fees result in more ETH being removed from circulation through token burning.
According to data provided by Ultrasound.money, last week the ETH supply shifted from its previous deflationary structure to an inflationary state with a supply growth rate of 0.49%. If network activity increases and more ETH is burned than issued, Ethereum could be expected to return to a deflationary state.
