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Currently, all ETH used to pay gas fees for transactions is burned. Nolan said: “Transactional call data makes up 90% of the costs that Layer 2s pay in terms of gas fees. However, after the merge update, Layer 2s can use the new blobspace mechanism, which has significantly lower gas costs, instead of sending their data through calldata. This means that gas prices could fall to lower levels as Layer 2s gradually transition to using this new blobspace mechanism, which means less ETH is burned.”

The decrease in Ethereum burning could impact the growth of ETH supply

According to Nolan, the potential decrease in ETH burning could impact the growth of ETH supply. However, the impact of the merge update and the blobspace mechanism could be offset by other factors.

Nolan highlighted that Layer 1 demand is significantly driving deflation and that “even very high blob usage would have a low impact on circulating supply,” saying: “Even if we see gas prices drop as Layer 2s adopt blobspace, there is no real concern that Ethereum will become significantly inflationary.” He added: “The goal of the merger update is to reduce gas fees for users transacting using roll-ups and to pull users back to the network because of lower transaction fees, so more activity generally means more gas usage.”

According to Nolan, the merge update’s mainnet activation could happen as early as March of this year. He said: “Ethereum core developers are expecting the mainnet activation of the Merge upgrade at least one month after Holesky. So at least in March, or probably later. It’s hard to give a firm timeline because testnet errors have emerged and have changed the timeline.”

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