CoinShares: Dencun hard fork may affect Ethereum issuance

What’s new? According to Luke Nolan, a researcher at investment firm CoinShares, the upcoming Dencun upgrade on the Ethereum network could affect ETH supply. He explained that the hard fork will allow Layer 2 (L2) network transactions to be sent via blobspace, an alternative to the current calldata mechanism. This could lead to lower gas consumption and thus less ETH burned. Currently, all coins used to pay gas for transactions are burned.

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Cryptocurrency burning is the process of removing a certain number of tokens from circulation, after which they become permanently inaccessible. Often burning is carried out in order to increase the rate of an asset or prevent it from inflation. Burning can be done by sending tokens to a wallet without a private key, by conducting a hard fork, using special software, or using algorithms that destroy some of the funds during transactions.

What else is known? According to Nolan, the demand for gas on the Ethereum network triggers a deflationary mechanism by burning gas, which can reduce the market supply of coins. Dencun can cause gas prices to be set at lower levels, the expert added.

That said, the impact of Dencun and the introduction of the blobspace mechanism may be mitigated by other factors. Nolan emphasized that L1 gas demand is what is largely driving deflation, and “even very high blob usage has a low impact on circulating supply.”

Nolan added that Dencun’s ultimate goal is to strengthen Ethereum’s market share, “so secondary effects are a net positive over the long run, regardless of short-term gas fluctuation.”

Ethereum blockchain developers deployed Dencun on the Goerli testnet on January 17. The hard fork will go live on the Sepolia and Holesky testnets on January 31 and February 7, respectively. According to Nolan, activation of the upgrade on the mainnet could happen as early as March this year. However, he added that it is difficult to give an exact time due to bugs in the testnet and shifting timelines.

According to Ultrasound Money, weekly ETH issuance is at a negative level, with 16 623 coins staked, while 19 110 coins have been burned. Since The Merge upgrade, which saw the network switch to the Proof of Stake (PoS) consensus algorithm, the asset’s annual issuance has decreased by 0,21%.