Ethereum Developers Clash Over the Network's Inflationary Economics

The extreme transaction fees that plagued the Ethereum blockchain have become a thing of the past.

Ethereum transaction fees have hit new lows in recent weeks, sometimes dropping as low as a single gwei — about $0.06 — for a simple transaction. This is a far cry from the peak of the bull market in 2021, when fees regularly exceeded $100.

The low fees are largely due to a combination of factors, including the bear market, which has led to a decrease in overall network activity, and the March upgrade, which made it much cheaper for Ethereum layer 2 networks to operate.

Layer 2s are separate blockchains built on top of Ethereum. In recent years, much of Ethereum’s activity has left the main network and moved over to comparatively cheaper and faster layer 2s.

Some worry that the move to layer 2s means Ethereum will never be deflationary again. Others believe that, as Ethereum grows through layer 2 networks, more and more activity will eventually funnel up to Ethereum mainnet.

Here's what some members of the Ethereum community have to say about the low transaction fees.

'I’m very confused'

Some people are happy that Ethereum now has lower gas fees, but others are worried about the inflationary implications. What are your thoughts on this trade-off?

I’m very confused that people think Ethereum having low gas fees is a problem. This is what we are working towards. The burn was, in my opinion, never meant to be an economic indicator.

The meme of ‘ultra sound money’ is broken

The low transaction fees have sparked a debate within the Ethereum community over the network’s economics. Some believe that the fees are too low and that they are causing the network to become inflationary. Others argue that the fees are fine and that the community should focus on other priorities, such as increasing adoption.

The burn amount has been less than the issuance amount since mid-April, making ETH inflationary. (ultrasound.money)

“The meme of ‘ultra sound money’ is broken,” said Preston Van Loon, an Ethereum core developer.

According to Van Loon, the March upgrade made it much cheaper for layer 2 networks to operate. This, in turn, has caused a shift in activity away from the Ethereum mainnet and onto the layer 2s.

“Layer 2s will constantly manoeuvre around each other to avoid creating a high fee environment for themselves,” said 0xbreadguy, a pseudonymous DeFi developer, in a widely circulated X post.

“The result is that fees on Ethereum will never get high again unless the network increases transaction demand significantly.”

'Not totally convinced'

Some people believe that the move to layer 2s will ultimately lead to Ethereum becoming deflationary once again. Others are more skeptical. What do you think?

I’m not totally convinced by the argument. It does make sense that, as Ethereum grows through layer 2 networks, more and more activity will funnel up to mainnet.

Mainnet will become the settlement layer and a place for end users to hold assets for long-term storage, while layer 2s become the user activity layer.

The solution? Get more users to transact on mainnet

Among those who believe the low transaction fees are an issue, there’s a popular solution: Get more users to transact on the Ethereum mainnet.

“You have to balance scaling through layer 2s with keeping your power users on mainnet — not pushing them off indiscriminately to one of a dozen ecosystems,” said 0xbreadguy.

“Transaction fees on layer 2s will always be lower than on mainnet due to the subsidy from the parent chain. As a result, the only way to keep activity on mainnet is if it provides something unique that layer 2s can't.”

One way to increase mainnet use is by raising the network’s gas limit, said Martin Köppelmann, founder of Ethereum sidechain Gnosis.

“Raising the gas limit would increase Ethereum mainnet's transaction capacity and reduce fees,” he said. “But it also runs the risk of raising operational costs for validators.”

Another solution would be to increase the base fee, which is the minimum amount of ETH that must be included in a transaction. This would make it more expensive to transact on Ethereum, but it could also help to reduce the backlog of pending transactions.

“Raising the base fee would increase the amount of ETH burned per transaction, but it could also lead to higher overall transaction fees,” said Köppelmann.

“Ultimately, the community will need to decide which trade-offs they are willing to make in order to achieve their goals for Ethereum.”

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