High Gas Fees Worth the Pain? Ethereum’s Deflationary Model in Action

In theory, a reduction in supply should drive ETH’s value as an asset upwards over time


lefthanderman/Shutterstock.com modified by Blockworks


Using Ethereum is expensive. 

Whether it’s from trading on DeFi, flipping NFTs, or gambling with memecoins, transaction fees have been driven upward for months on the network. The rise extends to simply sending tokens from one wallet to another.

While recent memecoin buffoonery has exacerbated the problem, ether (ETH) gas fees have been gradually climbing long before the more recent get-rich-quick PEPE craze, with previous perpetrators Uniswap and Blur elevating costs.

But it’s not all bad. New mechanisms introduced by EIP-1559 in 2021 brought in the burning of base fees, causing deflationary conditions for the network

This fee model contributes to the narrative of Ethereum as “ultrasound money,” reducing the supply of ETH as on-chain activity drives demand. Adam Smith might have been on to something.

In theory, a reduction in supply should increase Ethereum’s value as an asset in the long term. Avi Felman, head of digital asset trading at GoldenTree Asset Management, and Jonah Van Bourg, Cumberland’s global head of trading, spoke to Blockworks on the 1000x podcast about their evolving investment thesis for Ethereum.

“Even though 16 gwei is neutral gas levels for Ethereum,” Van Bourg says, “we’re consistently averaging 50 to 150 gwei.” As a result, ETH is highly deflationary at the moment, he says.  

“And even if it does eventually die down,” he says, “the ETH that’s being burned as a result of this activity is never coming back.”

Van Bourg asks Felman, “What does it mean for price, and what does it mean for supply and demand of block space? Is there an investment thesis there?”

EIP-1559 opened the monetary door

Felman says the “best thing” Ethereum ever did for itself was the implementation of EIP-1559, which made ETH as an asset more attractive for investment.

“It opened the door for so much institutional capital to come into this space,” he says. 

“I gave a talk last week at a conference that was filled with a lot of pension fund allocators, a lot of institutional allocators. I got an obscene amount of questions on it,” Felman says.

“My job,” he says, was to “teach these guys about what crypto is, cuz these guys knew, when I say nothing, I mean literally nothing, about crypto.”

Felman suggests Ethereum fee burns behave like traditional finance stock buybacks. Just as a company can buy back their own equity to indirectly increase value for shareholders, a fee burn can indirectly drive price action for anyone holding ETH. “If ETH annualizes out to $5 billion a year in burn fees, that’s a pretty substantial ‘buyback,’ right?”  

“And this is all during a bear market,” he adds.

“That really hit home for a lot of people.”

Ethereum stands apart from other layer-1 protocols because of this formula, Felman says. 

Other layer-1s like Solana, he says, do not generate fees in the same way — and, importantly, do not burn fees to reduce supply. Alternative layer-1s as such do not “generate revenue for their shareholders in the same way that Ethereum does,” so “allocators are just way less likely to come in and buy it.” 

“Because all eyes are on Ethereum, because that’s where the speculative money is, because that’s where the market participants are, they’re able to charge those fees,” he says. 

Felman compares the current attractiveness of Ethereum to the appeal of living in New York. “Yes, Manhattan’s expensive, but it’s expensive for a reason — because everybody’s there, and everybody that you want to be around is already there.”

And the beauty of proof of stake is that all of those fees that are burned and all the fees that are generated, Felman says, “are now paid back to owners of the asset.”

Don’t miss the next big story – join our free daily newsletter.


Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png


Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.



Equities were mixed toward the end of Monday’s session while cryptocurrencies continued their rally


Though the opposing flow trend is likely to slow over time, industry watchers note, bitcoin fund assets could one day eclipse the $90 billion gold ETF space


Celestia had the first mover advantage. EigenDA has staked ether. What sets Avail apart?


Bitcoin moved 1% higher Monday morning in New York, Matrixport analysts say $62,000 could happen next month


It’s hard to believe right now that crypto — even with all of its flexibility and massive capabilities — could ever be like cash on the internet


Michael Saylor announced Monday morning that MicroStrategy bought 3k more bitcoin after the X account was compromised over the weekend