Ethereum's Transformation Raises Concerns Over Its "Ultrasound Money" Status

Ethereum’s recent Dencun upgrade has sparked debate about its status as “ultrasound money” due to a decrease in fee burning and increased issuance. The report from CryptoQuant suggests that the introduction of EIP-4844 and the dominance of layer-2 solutions have reduced the network’s reliance on fee burning for supply reduction. Additionally, the upcoming Pectra hard fork has faced controversy over EIP-3074, which aims to enhance wallet management but raises concerns about potential security risks. Despite these issues, the Ethereum community has proposed increasing the ETH staking limit through EIP-7251 in the Pectra update.

Ethereum's Transformation and Its Implications for "Ultrasound Money"

Introduction

Ethereum, the world's second-largest cryptocurrency, has undergone significant upgrades in recent months, including the Dencun upgrade in March 2023. While these upgrades have aimed to enhance the network's scalability and efficiency, they have also raised concerns about the impact on Ethereum's long-standing reputation as "ultrasound money."

Defining "Ultrasound Money"

"Ultrasound money" is a term used to describe an asset with stable purchasing power and a decreasing total supply. This characteristic leads to deflationary pressure, as the scarcity of the asset increases over time. Bitcoin, with its capped supply of 21 million coins, is a classic example of ultrasound money.

Ethereum's Shift from "Ultrasound Money"

Analysts at CryptoQuant have observed a notable shift in Ethereum's monetary characteristics following the Dencun upgrade. Data from ultrasound.money shows that the global ETH supply has increased by nearly 35,000 ETH over the past 30 days, valued at approximately $106 million. This increase contradicts Ethereum's previous deflationary trend.

The primary reason for this inflationary trend is the dominance of layer-2 solutions on the Ethereum network. Layer-2 solutions, such as Polygon and Optimism, allow transactions to be processed off-chain, reducing congestion and lowering gas fees on the main Ethereum blockchain.

The Impact of EIP-4844

The Dencun upgrade introduced EIP-4844, a proposal that significantly reduces layer-2 transaction fees by creating a new block structure called "blobs." This feature has led to a steep decline in gas fees on layer-2 networks, further reducing the reliance on network activity for fee burning.

Concerns Over Ethereum's Deflationary Trend

Prior to the Dencun upgrade, high network activity resulted in significant ETH burning, limiting the growth of the token supply. However, the introduction of EIP-4844 has weakened the network's reliance on transaction volume for fee burning. This has raised concerns about the sustainability of Ethereum's deflationary trend.

Ethereum's Pectra Upgrade and Controversies

Ethereum is preparing for its next major upgrade, the Pectra hard fork. However, the upgrade has been met with controversy surrounding EIP-3074, a proposal designed to enhance wallet management and transaction security.

Concerns Regarding EIP-3074

EIP-3074 introduces the Invoker stage, responsible for processing and packaging transaction authorizations. Critics have raised concerns about potential vulnerabilities in this stage, arguing that malicious actors could exploit them to gain unauthorized access to funds.

Community Feedback and Response

Despite these criticisms, the Ethereum developer team has decided to include EIP-3074 in the upcoming Pectra hard fork. The community has also proposed the inclusion of EIP-7251 in the same update, aiming to increase the ETH staking limit and streamline the validator setup process.

Conclusion

Ethereum's recent upgrades have sparked ongoing debates about the network's monetary characteristics and the future of "ultrasound money." While the Dencun upgrade has improved scalability, it has also raised concerns about the inflationary trend it has introduced. The upcoming Pectra hard fork and the controversies surrounding EIP-3074 further highlight the challenges and complexities facing Ethereum as it navigates its path toward a more scalable and secure future.