Ethereum's gas fees have decreased significantly, causing the lowest burn rate in the past year, according to recent data. As a result, Ethereum is currently experiencing inflation. The average supply growth rate over the past week was 0.56% per annum, indicating a slight inflationary state. This decrease in gas fees and burn rate is attributed to the movement of activity from Ethereum's base layer to its layer 2 solutions. The release of the Dencun upgrade also reduced fees for layer 2 networks, intensifying this trend.

The number of active and upcoming layer 2 projects has increased, with users bridging more crypto assets to various layer 2 scaling rollups. Top layer 2s by total value locked, such as Arbitrum, Optimism, and Base, have seen increased active daily addresses, indicating rising user activity. Ethereum has also seen significant net outflows of ETH over the past three months, with most of the flows going to layer 2s like Arbitrum, zkSync, Base, Starknet, and Optimism.

This decrease in Ethereum's transaction costs reflects the evolution of blockchain technology. Ethereum initially served as a universal layer for all applications but is now transitioning to a foundational security layer and supporting more passive protocols. The decrease in gas fees and burn rate, combined with the increase in supply growth rate, indicates a shift in Ethereum's dynamics.

The impact of this shift is multifaceted, with Ethereum's upcoming London hardfork expected to include the EIP-1559 proposal, which will change the first-price auction fee mechanism to a new base fee model with an additional miner tip. This upgrade will make gas fees more predictable and improve efficiency but may negatively impact miners' earnings.

The combination of these factors indicates a significant development in Ethereum's dynamics, with a decrease in gas fees and burn rate, an increase in supply growth rate, and upcoming upgrades aimed at improving efficiency and predictability. As the cryptocurrency landscape continues to evolve, Ethereum's transition to a foundational security layer and its increased focus on passive protocols may have far-reaching implications for the future of cryptocurrency investment.