Dencun Upgrade Could Affect Ether Supply, Analyst Says

The Ethereum network has undergone several upgrades, and there are more to come in 2024, one of which is the Dencun Upgrade which CoinShares Ethereum research associate Luke Nolan said could affect Ether supply.

The upgrade will make it possible to send Layer 2 transactions to the Ethereum network through blobspace. Blobspace is an alternative to the current transactional calldata mechanism, which Nolan said could lead to reduced gas usage and, consequently, a lower amount of ether being burned.

Nolan’s concern stems from the fact that the old mechanism enables burning of all ether used to pay gas base fees for transactions, while the new mechanism doesn’t.

“Transactional calldata makes up 90% of the costs Layer 2s pay in terms of gas fees. But after the Dencun upgrade, instead of posting their data through calldata, Layer 2s can use the new blobspace mechanism, which has significantly lower gas costs. So, if we expect layer 2s to gradually shift to using this new blobspace mechanism, we could see gas prices settle at lower levels, which means less ether is burned,” Nolan told The Block.

Inflation in Ether Supply

Nolan expressed concern that the reduction in Ether burn due to lower gas fees through Layer 2s could lead to inflation in Ether supply. 

“Gas demand on the Ethereum network drives ether’s deflation mechanism via gas burn which can reduce the circulating supply of ether. The Dencun upgrade could see gas prices settle at lower levels,” Nolan added.

He however expressed optimism that the effect could be minimized, saying “even very high blob usage has a low impact on circulating supply.”

“Even if we see this reduced gas price because layer 2s are using the blobspace, there is no real concern that Ethereum will become significantly inflationary. The point of the Dencun upgrade is to decrease gas fees for users transacting using roll-ups, and bring users back to the network because of lower transaction fees, so more activity means more gas usage overall,” Nolan said.

He further added that the upgrade is meant to increase Ethereum’s market share, and so the inflation is a small price to pay as “secondary effects are a net positive over the long run, regardless of short-term gas fluctuation.”

Upgrade Schedule 

The Dencun Upgrade was activated on the Goerli testnet on Jan. 17. Several Ethereum improvement proposals were introduced through it, including EIP-4844, which enables the blobspace mechanism.

The upgrade is expected to be activated on the Sepolia testnet by January 30, and on the Holesky testnet on Feb. 7. After that, the mainnet activation could come as early as March, according to Nolan.

“Ethereum core devs expect that at least one month after Holesky the mainnet activation of the Dencun upgrade will go live. So at least March, or likely after. It is hard to give an exact time, as testnet bugs appear and change timeline,” Nolan said.

Ethereum has other upgrades scheduled for 2024, some of which analysts say could be responsible for making Ethereum to outperform Bitcoin. The Dencun upgrade may be of more interest to Ethereum users and developers though, due to high gas fees.

Currently, this is one of the challenges holding Ethereum back and besides, ether is a utility token on Ethereum and inflation in its supply shouldn’t be a concern.

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