Has the Ultra Sound Money Era Ended?

Ethereum
(ETH)
which
is
addressed
as
ultra-sound
money
due
to
its
deflationary
supply
method,
now
appears
to
be
facing
new
challenges
that
have
prompted
some
analysts
to
question
whether
this
narrative
still
holds.

A
prominent
crypto
analyst,
Thor
Hartvigsen,
recently
highlighted
this
issue
in
a
detailed
post
on
X,
where
he
discussed
the
current
state
of
Ethereum’s
fee
generation
and
supply
dynamics.

Is
ETH
No
longer
Ultra-Sound
money?

Hartvigsen
pointed
out
that
August
2024
is
“on
track
to
be
the
worst
month
in
terms
of
fees
generated
on
the
Ethereum
mainnet
since
early
2020.”
This
decline
is
largely
attributed
to
the
introduction
of
blobs
in
March,
which
allowed
Layer
2
(L2)
solutions
to
bypass
paying
significant
fees
to
Ethereum
and
ETH
holders.

As
a
result,
much
of
the
activity
has
shifted
from
the
mainnet
to
these
layer
two
(L2)
solutions,
with
most
of
the
value
being
captured
at
the
execution
layer
by
the
L2s
themselves.

Consequently,
Ethereum
has
become
net
inflationary,
with
an
annual
inflation
rate
of
approximately
0.7%,
meaning
that
the
issuance
of
new
ETH
currently
outweighs
the
amount
being
burned
through
transaction
fees.

Hartvigsen
disclosed
the
impact
of
this
on
Non-Stakers
and
Stakers:
According
to
the
analyst,
non-stakers
primarily
benefit
from
Ethereum’s
burn
mechanism,
where
base
fees
and
blob
fees
are
burned,
reducing
the
overall
supply
of
ETH.

However,
with
blob
fees
often
at
$0
and
the
base
fee
generation
decreasing,
non-stakers
are
seeing
less
benefit
from
these
burns.
At
the
same
time,
priority
fees
and
Miner
Extractable
Value
(MEV),
which
are
not
burned
but
rather
distributed
to
validators
and
stakers,
do
not
benefit
non-stakers
directly.

Additionally,
the
ETH
emissions
that
flow
to
validators/stakers
have
an
inflationary
effect
on
the
supply,
which
negatively
impacts
non-stakers.
As
a
result,
the
net
flow
for
non-stakers
has
turned
inflationary,
especially
after
the
introduction
of
blobs.

For
stakers,
the
situation
is
somewhat
different.
Hartvigsen
revealed
that
stakers
capture
all
the
fees,
either
through
the
burn
or
via
staking
yield,
meaning
that
the
net
impact
of
ETH
emissions
is
neutralized
for
them.

However,
despite
this
advantage,
stakers
have
also
seen
a
significant
drop
in
the
fees
flowing
to
them,
down
by
more
than
90%
since
earlier
this
year.

This
decline
raises
questions
about
the
sustainability
of
the
ultra-sound
money
narrative
for
Ethereum.
To
answer
that,
Hartvigsen
sated

Ethereum
no
longer
carries
the
ultra
sound
money
narrative
which
is
probably
for
the
better.

What’s
Next
For
Ethereum?

So
far,
it
is
quite
evident
with
the
current
trends
that
Ethereum’s
ultra-sound
money
narrative
may
no
longer
be
as
compelling
as
it
once
was.

With
fees
decreasing
and
inflation
slightly
outpacing
the
burn,
Ethereum
is
now
more
comparable
to
other
Layer
1
(L1)
blockchains
like
Solana
and
Avalanche,
which
also
face
similar
inflationary
pressures,
says
Hartvigsen.

Hartvigsen
notes
that
while
Ethereum’s
current
net
inflation
rate
of
0.7%
per
year
is
still
significantly
lower
than
other
L1s,
the
decreasing
profitability
of
infrastructure
layers
like
Ethereum
may
necessitate
a
new
approach
to
maintaining
the
network’s
value
proposition.

One
potential
solution
the
analyst
discussed
is
increasing
the
fees
that
L2s
pay
to
Ethereum,
though
this
could
pose
competitive
challenges.
Concluding
the
post,
Hartvigsen
noted:

Zooming
out,
infra-layers
are
in
general
unprofitable
(study
Celestia
generating
~$100
in
daily
revenue),
especially
if
viewing
inflation
as
a
cost.
Ethereum
is
no
longer
an
outlier
with
a
net
deflationary
supply
and,
like
other
infra-layers,
require
another
way
to
be
valued.

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