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The supply of ether could be impacted by the Ethereum network's upcoming Dencun upgrade, according to CoinShares Ethereum research associate Luke Nolan.

The Dencun upgrade will enable Layer 2 transactions to be sent to the Ethereum network through blobspace, an alternative to the current transactional calldata mechanism. This could result in reduced gas usage and, consequently, a lower amount of ether being burned.

All of the ether used to pay gas base fees for transactions is currently burned.

"Transactional calldata makes up 90% of the costs Layer 2s pay in terms of gas fees. But after the Dencun upgrade, instead of posting their data through calldata, Layer 2s can use the new blobspace mechanism, which has significantly lower gas costs. So, if we expect layer 2s to gradually shift to using this new blobspace mechanism, we could see gas prices settle at lower levels, which means less ether is burned," Nolan told The Block.

The possible reduction in ether burned could have an impact on the growth of ether supply.

"Gas demand on the Ethereum network drives ether's deflation mechanism via gas burn which can reduce the circulating supply of ether. The Dencun upgrade could see gas prices settle at lower levels," Nolan added.

However, the impact of the Dencun upgrade and the introduction of the blobspace mechanism could be mitigated by other factors. Nolan stressed that Layer 1 demand is what significantly drives deflation, and that "even very high blob usage has a low impact on circulating supply."

"Even if we see this reduced gas price because layer 2s are using the blobspace, there is no real concern that Ethereum will become significantly inflationary. The point of the Dencun upgrade is to decrease gas fees for users transacting using roll-ups, and bring users back to the network because of lower transaction fees, so more activity means more gas usage overall," Nolan said.

Nolan added that the end goal of the Dencun upgrade is to solidify Ethereum's market share, so secondary effects are a net positive over the long run, regardless of short-term gas fluctuation.

The Dencun network upgrade was activated on the Goerli testnet on Jan. 17 and introduced several Ethereum Improvement Proposals. Of particular interest is EIP-4844, which enables the blobspace mechanism.

The Ethereum Dencun upgrade on the Sepolia testnet is expected to be activated by Jan. 30, while the same upgrade on the Holesky testnet remains scheduled for activation on Feb. 7.

According to Nolan, the mainnet activation of the Dencun upgrade could come as soon as March of this year. "Ethereum core devs expect that at least one month after Holesky the mainnet activation of the Dencun upgrade will go live. So at least March, or likely after. It is hard to give an exact time, as testnet bugs appear and change timeline," Nolan said.

The price of ether has fallen by over 3% in the past 24 hours to trade at $2,377, according to The Block's Prices Page.

The price of ether has fallen in the past 24 hours. Image: The Block.

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Ether supply could be affected by Ethereum's Dencun upgrade, analyst says - The Block