L2 Value Feedback Capability Debate: Can ETH Reverse the Inflation Trend?
Since the upgrade in Cancun, the supply of ETH has increased by over 250,000 coins.Author: Azuma, Odaily Planet Daily
Ethereum (ETH) has recently been at the center of market discussions.
From Vitalik's comments on DeFi to his personal selling actions, as well as the various controversies surrounding the Ethereum Foundation, ETH seems to be facing the most negative market sentiment since the DAO incident.
In the following article, we will not focus on these relatively subjective topics, but rather discuss another objective numerical issue that has been put on the table ------ Since the Cancun upgrade, the long-term deflationary trend of ETH has been reversed since the Merge. If the current trend continues, the supply of ETH may return to the levels seen two years ago at the time of the Merge within a few months, and continue to inflate.
According to some market analysts, the recent inflation trend of ETH is the fundamental reason for the token's poor performance ------ encountering significant supply growth without a noticeable change in demand has led to an imbalance in supply and demand, resulting in a decline.
In recent days, several leading players in the Ethereum ecosystem (including researchers, project founders, VC representatives, etc.) have engaged in intense discussions on this issue, forming sharply contrasting viewpoints.
Discussion Premise
Before understanding this debate, we need to turn the clock back to March of this year.
On March 13, Ethereum officially activated the Dencun hard fork upgrade at Beacon chain slot height 8626176 (hereinafter referred to as the "Cancun upgrade"). The focus of this upgrade was EIP-4844, which will add an additional data space Blob in Ethereum blocks specifically for handling L2-related transactions.
In hindsight, the Cancun upgrade performed quite well in terms of reducing fees. With the introduction of the Blob, transaction fees on L2 networks have significantly decreased, and as L2-related transactions that were previously "squeezed" into calldata are moved to the Blob, the transaction fees on the Ethereum mainnet itself have also seen a certain decline. This was supposed to be a "win-win" situation, but over time, some observers have noticed a change in the supply trend of ETH ------ shifting from a deflationary state to an inflationary one.
The reason for this situation is that since the implementation of EIP-1559 three years ago, Ethereum has introduced a supply adjustment mechanism that "destroys a portion of transaction fees directly," aiming to permanently reduce the circulating ETH and lower Ethereum's inflation level.
Data from ultrasound.money shows that in early April this year (shortly after the Cancun upgrade was activated), the net deflationary amount of ETH (using the Merge as a reference) once peaked at about 457,000 coins. However, due to the introduction of the Blob, which significantly reduced transaction fees on L2 and L1, the number of ETH destroyed has seen a significant decline since then, with the net deflationary amount reduced to about 200,000 coins ------ this means that since the upgrade, the supply of ETH has increased by more than 250,000 coins.
As of the time of writing, based on data from the past 30 days, ETH may issue an additional 944,000 coins within a year, but can only destroy 151,000 coins. After comprehensive calculations, ETH is currently in an inflationary state, with an inflation rate of 0.66%.
From the above data, it can be intuitively concluded that at least in the past six months, the emergence of the Blob has reversed the long-term deflationary trend of ETH. Against this backdrop, market discussions are focused on whether this trend will continue? Does DA service (Blob) have a value feedback effect for ETH? Can the growth of L2 transactions drive an increase in Blob demand, thereby pushing ETH back into a deflationary state?
Pro Argument: Waiting for the Turning Point
In this debate, Ethereum ecosystem investor Ryan Berckmans can be seen as the representative of the pro side, with the core viewpoint being: The current utilization rate of the Blob is not yet saturated, but as L2 demand increases, once the Blob is saturated, the market will bid for the limited Blob space, thereby increasing the proportion of Blob fees and consequently increasing the amount destroyed, pushing ETH back into deflation.
In a recent X article, Ryan mentioned that the utilization rate of the Blob has remained stable at around 80% over the past few months, with each block purchasing about 2.4 Blobs (with a maximum of 3); meanwhile, L2 itself is continuously improving Blob utilization efficiency.
Therefore, Ryan believes that although the demand for the Blob has not shown significant growth in absolute numbers (utilization remains around 80%), this does not necessarily represent the real situation, as the growth may have been offset by ongoing efficiency optimizations in L2. According to data presented by L2 beat, demand on L2 has also maintained a good growth trend.
Against this backdrop, as L2 demand continues to grow, pushing the utilization rate of the Blob further up, the limited supply of Blobs will lead to bidding on L2, which is conducive to increasing the fee revenue for the Ethereum mainnet. In the long run, the fee revenue derived from DA (i.e., L2's Blob bidding) may even exceed the conventional L1 revenue (i.e., the execution fees for ordinary transactions on Ethereum).
Con Argument: Value Cannot Flow Back to L1
In response to Ryan's viewpoint, Doug Colkitt, founder of the DeFi protocol Ambient, provided a completely different perspective.
In an X article, Doug mentioned that many people hope to see the demand for the Blob continue to grow and achieve supply saturation, thereby reversing the inflation trend of ETH since the deployment of EIP-4844. However, this may not be realized, as the saturation of the Blob is unlikely to lead to any substantial increase in the amount of ETH destroyed.
Doug explained that most marginal transactions on L2 are low-value "junk transactions." If the Blob reaches saturation and enters a bidding mode, the transaction costs on L2 will inevitably rise significantly, and marginal transactions are often very price-sensitive. Therefore, the increase in Blob costs will indirectly lead to a sharp decrease in small transactions on L2.
Doug further stated that unless there is a surge in the number of relatively large L2 transactions, the growth in Blob demand will not drive an increase in ETH destruction, thus failing to change the current inflation trend. Given the current situation, Ethereum is unlikely to accumulate value for the mainnet through DA (Blob fees) in the foreseeable future.
More Important than Who is Right or Wrong, the Discussion Itself May Be More Valuable
Just as before the Cancun upgrade, few could have predicted the sudden change in ETH's supply situation. Regarding whether ETH's supply will see new changes after the Blob supply saturation, no one can currently provide a definitive conclusion.
It is important to emphasize that this article only focuses on the proposition of "Can the growth in Blob demand trigger changes in ETH supply?" The question of "Is the change in ETH supply really a factor affecting its price?" is another dimension of inquiry. From the perspective of project development, under the premise that the Blob can provide effective scaling, there is also controversy over whether "low fees + inflation" or "high fees + deflation" is better; in addition, after the Blob supply saturation, the increase in operating costs and changes within the L2 track also carry many uncertainties.
Ryan speculated on some potential changes within the L2 track in his article:
Will some L2s be forced to shut down due to rising Blob costs?
Will there be L2s turning to validium solutions?
Will there be L2s turning to L3 and sharing Blob space with other larger L2s?
If Blob fees increase, how much is reasonable?
What proportion of fees is expected to be reached?
If Blobs become too expensive, will L2s revert to using calldata solutions?
… These are all unresolved questions that have not been fully discussed.
Doug also mentioned in his article that his viewpoint is merely to refute the claims of some that "ETH will soon return to a deflationary state," but he does not know which situation is correct.
Some voices suggest that the Ethereum network should view L2 as a rapidly growing startup and treat low-income DA services as a strategy to capture market share through losses, considering profitability only after gaining market share; others believe that Ethereum may never need to profit through L2 but should instead reach more user groups through L2, making ETH a monetary asset.
These topics require further intellectual collision, and perhaps the discussion surrounding the current state and trends is more valuable than the outcome of "Can the growth in Blob demand trigger changes in ETH supply?"
