Ethereum No Longer ‘Ultrasound Money’? September Inflation Turns Investors Bearish
- September saw a notable rise in the crypto market cap.
- Ethereum moved further away from its deflationary narrative.
- L2s increasingly canibalize network traffic.
After months of bearish momentum, September was a month of recovery. Partly due to the Federal Reserve’s decision to lower interest, the total crypto market cap was rising. On the other side of the globe, China also cut interest rates, further fuelling optimism.
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These conditions helped drive growth in several key crypto assets, including Ethereum (ETH) . However, due to rising inflationary pressures of its own, ETH failed to capitalize and showed sluggish growth.
Ethereum No Longer ‘Ultrasound Money’?
While Ethereum presents itself as a deflationary asset, recent events have put that into question. On Friday, October 4, Binance’s report on the state of the crypto market in September highlights this issue for Ethereum, and how it translates to its underwhelming market performance.
Source: BinanceIn September, Ethereum’s issuance rate reached an annualized 0.74%. Like with fiat currencies, issuance of new coins translates to inflationary pressures. This puts into question Ethereum’s ‘Ultrasound Money’ narrative, which promised that ETH would be even more deflationary than Bitcoin.
This has put pressure on Ethereum’s gains in market cap. For instance, while Bitcoin’s market cap rose 7.5% in September, ETH’s market cap rose only 2.8%. Most recently, Ethereum has seen a major selling trend, with one whale dumping $48 million in ETH.
Why Ethereum is Becoming Inflationary
The likely source of this inflationary pressure is the drop in activity on the Ethereum mainnet. Notably, following the long-anticipated Decun upgrade in March, much of Ethereum traffic moved to its layer 2 chains.
While L2 chains are supposed to help with Ethereum’s scalability, they also demonstrate some adverse effects. Notably, both the Binance report and Sygil Bank’s recent report suggested that L2s are “cannibalizing” Ethereum’s traffic.
This is significant because traffic directly affects Ethereum’s inflation rate. After the Merge upgrade in 2022, Ethereum introduced a base burn rate for every transaction. At the same time, the network also creates new tokens to reward validators.
In periods of heavy network usage, such as the NFT boom, the burn rate was higher than the inflation rate. This made Ethereum deflationary. However, after the Dencun upgrade, L2s became more prominent, leading to a 15% decline in traffic for the Ethereum network.
On the Flipside
- While L2s have their drawbacks, they are essential for Ethereum to remain scalable and competitive in terms of fees.
- Thanks to improving scalability, L2s help grow the overall Ethereum ecosystem. This way, they can negate the adverse effects on base traffic in the long run.
Why This Matters
Ethereum’s recent inflationary turn challenges the narrative that Ethereum can serve as a deflationary asset like Bitcoin. This has significant implications for its price in the near term.
Read more about the Decun upgrade:
Ethereum’s Decun Upgrade Is Live: Here’s How Users Reacted
Read more about Solana vs Ethereum:
Is Solana Ready to Flip Ethereum? Sygnum Bank Thinks So
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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