Ethereum, once known for its high transaction costs, has seen a significant drop in gas fees. This makes the network more accessible to users but raises concerns about the potential impact on ETH value.
Historic Dip in Ethereum Gas Fees
A report from Kaiko, released on August 19, disclosed that Ethereum’s gas fees have fallen to the lowest they have been in five years. This decrease is due to increased activity on Layer 2 solutions and the effects of the Dencun upgrade in March 2024. The Dencun upgrade significantly lowered transaction fees on Layer 2 networks, contributing to the overall drop in gas fees. According to Dune Analytics, Ethereum’s gas fees last spiked significantly in March 2024, reaching over $603.2 million. Since then, they have been steadily decreasing, with July 2024 recording fees of around $93.4 million.
Impact of Gas Fees on ETH Supply
One of the effects of lower gas fees is a decrease in the quantity of ETH being burned. Under Ethereum’s EIP-1559 mechanism, a portion of gas fees is burned, effectively reducing the supply of ETH. With lower fees, less ETH is being burned, which could potentially lead to an increase in the token’s supply over time. The decrease in Ethereum gas fees, largely due to the Dencun upgrade and increased Layer 2 activity, has resulted in a decrease in the amount of ETH burned through transaction fees. As a result, the total supply of ETH has slowly increased from 120 million in March 2024 to over 120.2 million currently. This trend has been slow but steady, as shown by data from Glassnode. Kaiko’s report noted that this growing supply of ETH could potentially dampen price increases in the short term, even with positive demand drivers such as spot ETH ETFs. The increase in supply, without a corresponding increase in demand, could put downward pressure on ETH prices.
ETH Prices and Market Trends
Despite a slight increase of less than 1%, Ethereum is trading at around $2,648 at the time of writing. Ethereum has struggled to approach or test the $3,000 resistance level, with its short-moving average (yellow line) acting as a formidable barrier. Moreover, the Relative Strength Index (RSI) for Ethereum was around 40 at press time, indicating a strong bearish market trend.
The reduction in Ethereum gas fees is a significant development for network users, impacting the cost and supply of ETH. While improvements linked to the Dencun upgrade and Layer 2 activity have contributed to lower fees, it is important to monitor ongoing price and market trends.
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