The Ethereum network is currently experiencing significant challenges, as the rate of ETH burning has fallen sharply this year. The data indicates that base fees briefly dropped to multi-year lows of just under 0.8 Gwei. This substantial decrease has also impacted the Ethereum network’s economy, evidenced by the fact that on August 10, only 210 ETH were burned, setting a record low for this year.
Notable Drop in ETH Burn Rate
The low burning level of ETH on August 10 stands in stark contrast to the figures from August 5, when base fees surged to 100 Gwei and daily ETH burning escalated to 5,000 ETH. This sharp decline has had a considerable effect on the network’s inflation rate, which we monitor.
Martin Köppelmann, the founder of Gnosis, highlighted this troubling trend and suggested a temporary increase in the gas limit to boost first-layer activity. According to Köppelmann, while it may appear “controversial,” raising the gas limit alongside low gas fees could be part of a broader strategy to mitigate staking rewards.
Basefee right now at a multi-year low of ~0.8 GWEI. 23.9 would be required to offset staking rewards. IMO, Ethereum needs to initiate more L1 activity again, and even if it sounds counterintuitive at such low rates, raising the gas limit can be part of a strategy. pic.twitter.com/RaTkzKOx1r
— Martin Köppelmann 🦉💳 (@koeppelmann) August 10, 2024
Ethereum Gas Fees Fall Below 1 Gwei
The gas fee, which includes both the base fee and any priority fee, briefly dropped to 0.979 Gwei over the weekend. This reduction underscores the impact of the August 2021 London hard fork (EIP-1559), which implemented a mechanism to burn the base fee, consequently decreasing the supply of ETH.
The current decline in base fees is primarily attributed to users migrating to layer 2 scaling solutions, as well as the blob transactions introduced in the Dencun update in March, which significantly reduced costs on layer 2 networks.
What Can We Conclude?
The present situation of the Ethereum network clearly signifies that alterations made in the fundamental operations of the system, such as the burning mechanism introduced by EIP-1559, significantly influence the economic parameters of the network. As users increasingly adopt layer 2 solutions, the drop in gas fees introduces new challenges for the Ethereum community. Martin Köppelmann’s suggestion to raise the gas limit may present a viable solution, but additional measures may also be necessary to ensure the network’s long-term sustainability.
The current dilemma for the Ethereum community is how to tackle these challenges and what actions they can take to preserve the stability and economic equilibrium of the network. While low gas prices might be advantageous for users, fine-tuning the core parameters is crucial for maintaining the operation and security of the network.
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<p><strong>The Ethereum network is currently facing major challenges as ETH burning has dropped drastically this year. The <a href="https://ultrasound.money/">data</a> show that base premiums briefly fell to multi-year lows of just under 0.8 Gwei. This significant decrease also affected the economy of the Ethereum network, as according to the data of August 10, only 210 ETH were burned, which is a record low level for this year.</strong></p>
<h2>Significant Decrease in ETH Output</h2>
<p>The low level of ETH burning on August 10 is in stark contrast to the data recorded on August 5, when base fees rose to 100 Gwei and daily ETH burning increased to 5,000 ETH. This sharp decline had a significant impact on the inflation rate of the network, which we continue to monitor closely.</p>
<h3>The Impact of ETH Deflation</h3>
<p>The Ethereum network's transition to Proof of Stake has already shown its potential to change the dynamics of ETH supply. With lower ETH burning rates, inflation could creep back in, undermining the deflationary aspects that many in the Ethereum community had come to appreciate.</p>
<h2>Gas Fees and User Activity</h2>
<p>Martin Köppelmann, the founder of Gnosis, expressed concern over this worrying phenomenon and proposed a temporary increase in the gas limit to increase the activity of Layer 1. According to Köppelmann, although it may seem "controversial", a raised gas limit in conjunction with low gas fees might be part of a broader strategy to stabilize staking rewards.</p>
<blockquote class="twitter-tweet" data-width="500" data-dnt="true">
<p lang="en" dir="ltr">Base fee right now at a multi-year low of ~0.8 Gwei. 23.9 would be required to offset staking rewards. IMO Ethereum needs to get more L1 activity again and even if it sounds counterintuitive at such low rates, raising the gas limit can be part of a strategy. <a href="https://t.co/RaTkzKOx1r">pic.twitter.com/RaTkzKOx1r</a></p>
<p>— Martin Köppelmann 🦉💳 (@koeppelmann) <a href="https://twitter.com/koeppelmann/status/1822394564566745417?ref_src=twsrc%5Etfw">August 10, 2024</a></p>
</blockquote>
<h2>Ethereum Gas Fee Trends</h2>
<p>Notably, the total gas fee, including both the base fee and any priority fee, briefly plummeted to 0.979 Gwei over the last weekend. This decline underscores the effects of the August 2021 London hard fork (EIP-1559), which introduced a mechanism to burn the base fee, thus reducing the overall supply of ETH.</p>
<h3>Migration to Layer 2 Solutions</h3>
<p>The low base fees can be attributed to users migrating to Layer 2 scaling solutions. Furthermore, the blob transactions introduced in the Dencun update in March have significantly cut costs on Layer 2 networks, drawing more users away from Layer 1.</p>
<h2>Potential Solutions for the Ethereum Community</h2>
<p>The current ETH burning scenario emphasizes that the fundamental changes in Ethereum's operation—like the EIP-1559 burning mechanism—have considerable economic implications for the network. As user activity shifts towards Layer 2, the drop in gas fees poses new challenges for maintaining the network’s economic vibrancy.</p>
<h3>Addressing Economic Stability</h3>
<ul>
<li><strong>Increase the gas limit:</strong> As suggested by Köppelmann, raising the gas limit could stimulate Layer 1 activity, helping balance the ETH economy.</li>
<li><strong>Promote Layer 1 use cases:</strong> By encouraging developers to build projects directly on Layer 1, the Ethereum community can foster greater activity which might help drive gas prices up.</li>
<li><strong>Long-term strategies:</strong> Implementing incentives for ETH holders and stakers could maintain interest in the network.</li>
</ul>
<h2>Case Studies of Successful Gas Fee Adjustments</h2>
<table class="wp-block-table">
<thead>
<tr>
<th>Event</th>
<th>Date</th>
<th>Gas Fee (Gwei)</th>
<th>ETH Burned</th>
</tr>
</thead>
<tbody>
<tr>
<td>High Activity Surge</td>
<td>August 5, 2024</td>
<td>100 Gwei</td>
<td>5,000 ETH</td>
</tr>
<tr>
<td>Record Low Activity</td>
<td>August 10, 2024</td>
<td>0.8 Gwei</td>
<td>210 ETH</td>
</tr>
<tr>
<td>Gas Fee Drop</td>
<td>August 2023</td>
<td>0.979 Gwei</td>
<td>Data Unavailable</td>
</tr>
</tbody>
</table>
<h2>Conclusion</h2>
<p>The Ethereum network faces a critical juncture as low ETH burning rates threaten to tilt the economic balance. With increasing user migration to Layer 2 solutions, it becomes paramount for the Ethereum community to react and implement effective solutions. By closely monitoring gas fee trends and user activity, we can develop a framework to ensure both the short-term stability and long-term sustainability of Ethereum's economy.</p>
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