Ethereum Gas Fees Hit a New Low: Is This a Bad Omen or a Signal Before a Rise?

Recently, the Gas fee of the Ethereum network has reached a record low, and some analysts believe that this may indicate that ETH is about to usher in a wave of big increases.

On August 12, 2024, it was reported that the Gas fee on the Ethereum network had dropped to 2 gwei, the lowest point in the past five years. Due to this situation, the inflation rate of Ethereum has begun to rise again, which has made people worry about the supply and long-term value of ETH.

However, 2 gwei is not the lowest point. On August 16, the Gas price of Ethereum continued to fall, and the average transaction fee fluctuated between 1.1 and 1.9 gwei, and sometimes even less than 1 gwei.

Some analysts believe that this phenomenon is the result of a combination of factors. First, although the number of Ethereum users remains stable, the demand for block space is insufficient. Most of the current transactions are bridge activities, staking operations, or approval transactions, which do not consume too much Gas fees. Additionally, as the cost and performance of Layer 2 scaling continues to decrease, more and more users are choosing to use other blockchains, and the memecoin craze on Solana is attracting a large number of users.

Since the completion of the Dencun upgrade in April this year, the cost and performance of new blockchains and Layer 2 networks have improved, which is in line with Ethereum founder Vitalik Buterin’s vision of migrating more transactions to Layer 2 networks.

Although gas fees are low, it does not mean that "blockchain is dead". Key indicators such as the number of daily transactions, active wallet addresses, and ERC-20 addresses of the Ethereum network are still strong and show no signs of slowing down.

Even more interestingly, historical data shows that whenever gas fees fall to new lows, the price of ETH usually sees a strong rise shortly afterwards. Ryan Lee, chief analyst at Bitget Research, believes:

"When the Ethereum network gas fee drops to a new low, it often means that the ETH price is close to the mid-term bottom. Usually, the ETH price will rebound strongly after this stage, and now it is in a rate cut cycle, which may pave the way for historic price increases in the next period of time."

However, as the gas fee drops, the number of ETH destroyed through the EIP-1559 mechanism has also dropped significantly, which means that the ETH supply has begun to increase and inflation is back.

Data shows that the supply of Ethereum has increased by more than 16,000 ETH in the past week, which is about 42 million US dollars at the current price, which makes the annual increase in supply reach 0.7%. This is indeed different from the deflationary state when transaction fees were high in the past.

Some community members are also worried that although Layer-2 solutions may drive demand, it may also make it difficult for Ethereum to return to a deflationary state. It was subsequently suggested that in order to increase the transaction volume of the Ethereum mainnet, more users could be attracted to join the mainnet by raising the gas limit. This method was first proposed by Vitalik Buterin to increase the transaction capacity of the Ethereum mainnet and reduce fees, but it may also increase the operating costs of validators.