Ethereum's Dencun Upgrade: Layer 2 Activity Surges, ETH Deflation Slows

Ethereum Ecosystem Data Soars After Dencun Upgrade, ETH Deflation Trend Slows

In March 2024, Ethereum completed its highly anticipated Dencun upgrade, the most significant network update since the Shanghai upgrade. The core of the upgrade was the introduction of EIP-4844 (Proto-Danksharding), which aims to drastically reduce transaction costs for Layer 2 (L2) solutions through a temporary data storage space called "blobs." Months after the upgrade, its actual impact on Ethereum mainnet gas fees, Layer 2 transaction volumes, and ETH supply has become clear. Overall, the L2 ecosystem has experienced explosive growth, but the deflationary trend on the Ethereum mainnet has noticeably slowed, prompting the market to reassess this trade-off.

Mainnet Gas Fees Drop Significantly, But Not to Zero

The most direct effect of the Dencun upgrade was a reduction in some gas fees on the Ethereum mainnet, especially those related to L2 data publication. Before the upgrade, L2 networks paid high calldata fees to post transaction data to the mainnet, costs ultimately passed on to L2 users. After the upgrade, L2 networks switched to cheaper blob space, causing average mainnet gas fees to drop by about 70% to 80% in the weeks following the upgrade. According to Etherscan data, mainnet gas fees, which often hovered between 30-50 Gwei before the upgrade, fell to single-digit Gwei afterward.

However, gas fees did not drop to zero as some extreme predictions suggested. As DeFi activity and meme coin trading on the Ethereum mainnet recovered, network congestion increased. By the end of the second quarter of 2024, mainnet gas fees had rebounded to the 15-25 Gwei range, still significantly lower than pre-upgrade peaks. This indicates that Dencun succeeded in lowering base costs, but the mainnet's pricing mechanism remains driven by supply and demand.

Layer 2 Transaction Volumes Skyrocket, Reshaping the Ecosystem

The biggest winners from the Dencun upgrade were undoubtedly Layer 2 ecosystems. With the introduction of blob space, transaction costs on L2 networks fell by over 90%. According to L2Beat data, within a week of the upgrade, the combined transaction volume of major L2 networks (such as Arbitrum, Optimism, and Base) surged more than 300% compared to pre-upgrade levels. Among them, Coinbase's Base network saw particularly rapid growth, with its daily transaction volume briefly surpassing that of the Ethereum mainnet itself.

This cost advantage has spawned new application scenarios. Applications like "micropayments" and "high-frequency trading," which were previously impractical due to high gas fees, have begun to emerge on L2 networks. For example, the decentralized social protocol Farcaster saw a surge in user activity after the upgrade, primarily driven by Base's extremely low transaction fees. At the same time, competition among L2 networks has intensified, with multiple networks vying for users through airdrops and incentive programs, further boosting overall on-chain activity.

However, the L2 boom has not fully translated into value capture for the Ethereum mainnet. Although the volume of blob data submitted by L2 networks to the mainnet continues to grow, the cost per blob is much lower than previous calldata fees, causing the mainnet's revenue from L2 activity to shrink significantly.

ETH Supply: Deflation Slows, Inflationary Pressure Emerges

The impact of the Dencun upgrade on ETH supply is a key focus for the market. Since the Ethereum Merge in September 2022, ETH entered a deflationary state, mainly due to the EIP-1559 burn mechanism (where base fees are destroyed) and lower staking rewards. However, the Dencun upgrade has altered this balance.

After the upgrade, due to the overall decline in mainnet gas fees, the amount of ETH burned through base fees also decreased. According to Ultrasound.money data, before the upgrade, Ethereum burned approximately 2,000 to 3,000 ETH daily; after the upgrade, this figure dropped to 1,000 to 1,500 ETH. Meanwhile, while increased L2 activity has boosted mainnet validators' MEV (Maximum Extractable Value) and priority fee income, this has not been enough to offset the decline in burned ETH.

Overall, Ethereum's net issuance rate (new staking rewards minus burned ETH) has shown a clear trend of turning from negative to positive after the upgrade. Before the upgrade, ETH supply was deflating at an annualized rate of about 0.2%; after the upgrade, the deflation rate has dropped to near zero, with even slight inflation occurring in some periods. This means that while Dencun improved network scalability, it sacrificed some of ETH's monetary properties. The market's reaction is mixed: on one hand, L2 activity enhances Ethereum's utility as a settlement layer; on the other hand, the weakening deflation narrative may undermine some investors' long-term confidence in holding ETH.

Future Outlook: Trade-offs and Balancing Acts

The Dencun upgrade marks Ethereum's official entry into an "L2-centric" development phase. In the short term, the surge in L2 ecosystem data validates the technical direction, but long-term value capture issues remain unresolved. The Ethereum Foundation and core developers have begun discussing subsequent upgrades, such as Verkle trees and state expiry, aimed at further reducing the mainnet's burden and improving efficiency.

For ETH holders, the slowdown in deflation does not necessarily mean a "bearish" signal. If the L2 ecosystem can continue to attract users and capital, and eventually feed back into the mainnet through cross-chain bridges and interoperability protocols, Ethereum's overall network effect could still strengthen. Conversely, if L2 networks become "isolated islands" and the mainnet is reduced to a mere "data availability layer," ETH's valuation model may need to be repriced.

Currently, the market is in the early stages of this balancing act. Investors should closely monitor L2 activity, changes in mainnet revenue, and the long-term trend of ETH supply.

Risk Disclaimer

The above content is for reference only and does not constitute investment advice. The cryptocurrency market is highly volatile, and policy and technological changes may significantly impact the network. Investors should make independent decisions based on their own risk tolerance.