Thanks to the increased on-chain activity and high gas prices, Ethereum experienced its first-ever deflationary week since its inception. In addition to more liquidity leaving exchanges and being locked up in smart contracts, a sustained deflationary scenario will likely contribute to a supply shock as ETH becomes scarcer amid rising demand.
If we expect volatile price action to continue in the coming months it could keep gas prices high, which risks pricing out a large cohort of smaller retail users. There’s also a balancing force at play here; when gas prices on Ethereum are too expensive, on-chain activity (and therefore demand for block space) may fall, reducing demand for ETH, which can have an adverse impact on price (all else held equal).
Therefore, it is critical that Ethereum scaling solutions like StarkNet, zkSync, Arbitrum, and Optimism gain traction soon, otherwise steep transaction costs will increase activity on alternate L1s such as Solana, Avalanche, Fantom, and Polygon (to name a few).