Ethereum still is number two. There is no second best in terms of liquidity on the blockchain network. But how is it priced and what are some advancements that we need to understand? Understanding Ethereum’s cyclical nature is thus the next thing we are going to do. Let’s discuss the burn and expand cycles of Ethereum.
What Drives Ethereum’s Revenue Leadership?
Ethereum still remains the top choice for developers and investors who seek quality in blockspace, which is essentially the capacity for processing transactions and storing data. People are willing to pay a premium for Ethereum because of its secure and liquid nature.
How Does Ethereum’s Value Accrual Mechanism Work?
But what a lot of people don’t know is that Ethereum’s value accrual is influenced by its unique cycle between two states: burn and expand. A cyclical mechanism that is designed to manage its supply and demand effectively while maintaining its decentralized ethos. It was launched not too long ago with the transition from proof of work to proof of stake.
What are Burn Cycles?
During burn cycles, the demand for Ethereum’s blockspace exceeds the available supply, leading to more ETH (Ethereum’s native currency) being burned than issued. This process temporarily turns Ethereum deflationary, increasing the scarcity and potentially the value of ETH. The last burn cycle began in the spring of 2023 and shifted to an expansion in March 2024.
What are Expand Cycles?
Expand cycles occur when Ethereum increases its blockspace supply, making it inflationary during this phase. This increase makes blockspace cheaper and more abundant, encouraging use and development within the Ethereum network. The most recent expansion was in March 2024 with the introduction of EIP-4844, which increased transaction throughput significantly.
How Does Ethereum Plan to Evolve Its Technology?
Ethereum’s upgrades are incremental and carefully tested, similar to how CPU performance is enhanced with new technology models. For example, the introduction of blockspace in March 2024 under EIP-4844 allowed for faster transaction capabilities for rollups, crucial for Ethereum’s scalability.
Both burn and expand cycles are beneficial for ETH. In burn cycles, ETH’s deflationary aspect increases its scarcity, enhancing its appeal as a store of value—akin to digital gold. During expand cycles, the increased blockspace lowers costs and stimulates demand within Ethereum’s Layer 2 (L2) ecosystems, promoting its use as a currency.
Why Might Ethereum’s Value Be Underestimated?
Despite having a lot of competitors, even layer twos that seem to surge and be a competitor of the mainnet, they are still using the infrastructure and economic model of Ethereum. The most revenue is generated on Ethereum and therefore Ethereum could be seen as an undervalued asset with significant long-term growth potential.
