This puts pressure on it to pursue a deflationary characteristic. But why is Ethereum inflation occurring? Let’s break it down.
Layer-2 Solutions and Lower ETH Burns
Layer-1 has always been able to offer higher-than-average throughput within the Ethereum network. There is a change in the Ethereum network known as EIP 1559, suggesting that the transaction fees disposed of a minor component. This burning mechanism assisted ETH in switching to deflationary. With this, the network burns more ETH and doesn’t create more ETH.
EIP-7781 proposes reducing Ethereum’s slot time from 12 seconds to 9 seconds to increase transaction throughput by approximately 33%. This change aims to distribute bandwidth usage over time, lowering peak bandwidth…
However, the situation has changed recently. Layer-2 solutions such as Arbitrum and Optimism have come into play. They enable people to transact on sidechains (layer-2), reducing transaction costs on Ethereum.
While this is good for users, it drives more volumes outside Ethereum’s leading network, meaning they burn less Ether. The Dencun upgrade has helped spur change toward layer-2 solutions. However, reduced transaction activity on the mainnet and a slower ETH burn rate is causing inflation.
The ‘Dencun’ upgrade is a major hard fork upgrade, scheduled for March 13, which is intended to enhance the Ethereum network’s scalability, security, and usability.
It’s part of ‘The Surge’ on Ethereum’s roadmap, the series of updates focused on scalability. pic.twitter.com/hPoQAbjyLS
Ethereum’s inflation rate is now 0.74%. The Ethereum network generates more ETH than it burns, resulting in a growing total supply. According to a report by Binance, this is the highest increase in the asset’s cost in the last two years.
This raises a fundamental question: What has happened to Ethereum’s deflationary status? The “ultrasound money” story—where we see Ethereum as a deflationary asset—is sideswiped. There is inflation on Ethereum’s issuance now, more than burns.
However, this research explains that inflation at a rate below 1% is not a vice. There is always interaction in a given network; hence, inflation occurs during specific periods when the activity level is a bit low. Nevertheless, the same scenario can happen in Ethereum, and the asset will return to a deflationary paradigm during periods of high activity. In periods of high activity, they burn more ETH and do not increase ETH creation.
➜ ETH Inflation Rate Rises
Ethereum’s inflation rate has surged to 0.74%, challenging its narrative of becoming “ultrasound money.”
A new report from Binance Research highlights how the rise in Layer 2 solutions has curbed transaction burns, thereby reducing Ethereum’s… pic.twitter.com/k13DR8ybTv
Now that everybody is focusing on Ethereum’s inflation, another ongoing debate exists in the Ethereum community. The founder, Vitalik Buterin, recently spoke about reducing the least Ether necessary for solo staking.
Today, to be a solo staker, one has to stake 32 ETH, which poses a challenge to most community users. Buterin proposed decreasing this to roughly 16 to 25 ETH to encourage more participation. With this, you could run your node without the help of third parties or staking providers.
SHOCKING: @VitalikButerin, the creator of #Ethereum; stated in an interview that he is only staking “a fairly small portion” of his $ETH holdings out of concerns for “safety” and privacy due to stake keys being public and lack of support for multi-sig wallets.
— The Cardano Times (@TheCardanoTimes) June 30, 2023
Conclusion
One thing that is increasing is Ethereum Inflation. Layer-2 protocols have reduced the ETH burns, and this is the concept that is evidence of the network’s progress. Ethereum is still developing, and deflation results might occur with increased activity. On the other hand, Buterin’s ongoing efforts to encourage solo stakers’ growth might enhance the network even further.
Disclaimer
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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