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Ethereum Dencun Upgrade to Affect ETH Price, Analysts Say

The upcoming Dencun upgrade of the Ethereum network might have repercussions on the supply of ether, as noted by Luke Nolan, a research associate specializing in Ethereum at CoinShares.

Tue, 23 Jan 2024, 09:08 am UTC

Luke Nolan, a research associate specializing in Ethereum at CoinShares, warns that the upcoming Dencun upgrade of the Ethereum network may influence the supply of Ether.

The Dencun upgrade introduces the blobspace, an alternative to the current transactional calldata mechanism, facilitating Layer 2 transactions on the Ethereum network. This change can reduce gas usage, decreasing the amount of Ether burned during transactions.

Currently, all Esther used for gas base fees in transactions is burned. Nolan explained, "Layer 2s pay 90% of their gas fees for transactional calldata. With the Dencun upgrade, instead of using calldata, Layer 2s can opt for the new blobspace mechanism, significantly reducing gas costs. This shift could stabilize gas prices at lower levels, resulting in less Ether being burned."

Impact on Ether Burn Mechanism

The anticipated reduction in Ether burned may impact the overall growth of Ether supply. Gas demand on the Ethereum network is a crucial driver of Ether's deflation mechanism through gas burn, potentially reducing the circulating supply of Ether. Nolan emphasized that even with reduced gas prices due to blobspace usage, Ethereum is unlikely to become significantly inflationary.

"Layer 1 demand is crucial for driving deflation. The Dencun upgrade aims to decrease gas fees for roll-up transactions, attracting users back to the network with lower fees. Increased activity means higher overall gas usage," Nolan explained.

According to The Block, despite potential changes to the Ether burn mechanism, Nolan highlighted that secondary effects of the Dencun upgrade are likely to be a net positive in the long run. He underscored that Ethereum's goal is to solidify its market share, and any short-term gas fluctuations are overshadowed by the broader objective of enhancing user experience and network activity.

Dencun Upgrade Schedule

The Dencun network upgrade was initiated on the Goerli testnet on Jan. 17, introducing Ethereum Improvement Proposals, including EIP-4844 for the blobspace mechanism. The Sepolia testnet is set to activate the Dencun upgrade by Jan. 30, with the Holesky testnet following on Feb. 7.

According to Coin Gape, Nolan indicated that mainnet activation of the Dencun upgrade could occur as early as March this year. However, he cautioned that unforeseen testnet issues could impact the timeline. Ethereum core developers anticipate the mainnet activation to happen at least one month after Holesky, but exact timing remains uncertain due to potential testnet challenges.

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