Ethereum’s ambitious ‘ultrasound money’ narrative has taken a significant hit as Ether (ETH) has plummeted 65% against Bitcoin (BTC) since the network’s transition to Proof-of-Stake (PoS) in 2022. This sharp decline has raised serious questions about the viability of Ethereum’s deflationary strategy and its ability to compete with Bitcoin’s market dominance.
The Promise of ‘Ultrasound Money’
When Ethereum introduced the EIP-1559 upgrade in 2021, it was hailed as a game-changer. The upgrade included a mechanism to burn a portion of transaction fees, which, combined with the reduced issuance of new ETH following the 2022 Merge, was supposed to make Ether deflationary. The idea was that over time, the supply of ETH would shrink, making it even scarcer than Bitcoin. However, the reality has not lived up to the hype.
Supply Growth and Transaction Fees
Since the transition to PoS, Ethereum’s annual supply growth rate has been about 0.23%, which is higher than the -0.19% deflationary rate seen after the EIP-1559 upgrade. This modest growth rate, while still lower than Bitcoin’s current annual inflation rate of 0.85%, has undermined the ‘ultrasound money’ thesis. Moreover, Ethereum’s average transaction fee has dropped from around $0.46 in March 2022 to about $0.21 in March 2023, a 54% decrease. Lower fees mean fewer ETH are being burned, weakening the deflationary effect.
Layer-2 Scaling and Network Activity
Another factor contributing to the underperformance of ETH is the shift in network activity to cheaper layer-2 (L2) solutions. According to L2beat, rollups are handling about 926 user operations per second (UOPS), while Ethereum’s mainnet processes only 22.36 UOPS. While this scaling is beneficial for the network, it has reduced the number of transactions on the mainnet, further diminishing the burn rate of ETH.
Investor Trust in Bitcoin
Investors’ preference for Bitcoin’s fixed supply schedule over Ethereum’s more flexible monetary policy is another key reason for ETH’s underperformance. Bitcoin’s 21 million coin cap and predictable issuance rate have made it a trusted store of value. Analyst Handre notes, ‘Every scaling debate, every upgrade proposal, every attempt to change Bitcoin’s monetary policy has failed because the economic majority understands what they’re protecting.’ Ethereum, on the other hand, has struggled to maintain a consistent monetary policy, which has eroded investor confidence.
ETF Market Sentiment
The sentiment is also reflected in the U.S. ETF market, where spot Bitcoin ETFs hold over $91.9 billion in assets under management, compared to just $12.1 billion for spot Ethereum ETFs. This disparity highlights the market’s preference for Bitcoin’s stability over Ethereum’s innovation.
Future Outlook
Despite the challenges, Ethereum’s community remains optimistic about the long-term potential of the network. The shift to PoS has significantly reduced energy consumption and improved security, and ongoing developments in layer-2 solutions promise to enhance scalability and user experience. However, for Ethereum to regain its momentum, it will need to address the issues surrounding its deflationary narrative and demonstrate a more consistent approach to monetary policy. Only then can it hope to challenge Bitcoin’s dominant position in the crypto landscape.
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