Impact on Ethereum supply
Luke Nolan, who conducts research on Ethereum (ETH) at CoinShares, a crypto asset (virtual currency) investment company, analyzed the impact that Ethereum’s next upgrade, “Dencun,” will have on supply. The Block, which received information from him, reported on the 22nd.
Nolan analyzed that the amount of Ethereum burned could be reduced by implementing “Proto-Danksharding”, which is attracting the most attention in Dencun. However, he said he is not worried about rapid token inflation in Ethereum.
connection: What are the importance and benefits of Ethereum’s next upgrade “Dencun”?
Proto-dunk sharding is not a feature that directly affects the supply of Ethereum. The main purpose of implementing this feature is to reduce the transaction cost of data transfer from L2 to L1.
The reason why Nolan analyzes that this feature may have an impact on burn and supply is that the implementation of proto-dank sharding will lower transaction fees (gas fees), making it more likely that burn will occur. This is because the base fee (basic commission) will also decrease.
He pointed out that 90% of the gas bill currently paid on L2 is used for data called “Calldata.”
Proto-dunk sharding replaces call data with data called “blobs” to lower gas costs, so if each L2 network supports proto-dunk sharding, the base fee will remain low and stable. It states that the quantity burned may decrease.
What is L2?
Abbreviation for “Layer 2”, which refers to the “second layer” network. If all transactions are processed on the main chain, the load will be heavy, leading to a decrease in processing speed and a rise in network fees. By performing some transactions on L2, it is expected that the load on the main chain will be reduced and processing speed will be improved.
▶️Virtual currency glossary
connection:What is blockchain layer 2? Explaining types, points of interest, and typical networks
When will it be implemented on the mainnet?
On the other hand, even if the gas price falls due to proto-dunk sharding and the amount of burn is reduced, the demand for Ethereum itself will increase, so the effect of this function on the circulating supply amount will be limited.
The point of proto-dunk sharding is to lower network costs, and if gas prices fall, the number of users will increase, which is expected to lead to an increase in transactions.
He also expressed the view that even if gas prices fluctuate in the short term, Dencun will also help increase Ethereum’s market share in the long term.
connection: “Ethereum is expected to outperform Bitcoin’s growth rate” JP Morgan forecast for next year
Currently, Ethereum is experimenting with Dencun on the testnet “Goerli”, and plans to experiment with Dencun on two testnets: “Sepolia” and “Holesky” in the future. The upgrade is scheduled for January 30th for Sepolia and February 7th for Holesky.
Nolan said that Ethereum developers hope to implement Dencun on the mainnet one month after Holesky, and predicts implementation on the mainnet will be March at the earliest. However, he said it was difficult to predict the exact timing, as plans could change if bugs or other problems were discovered.
connection: Ethereum begins testing next upgrade “Dencun”