Faced with the fall of cryptocurrencies, Ethereum becomes inflationary again

ETH at the stake – Last year, blockchain Ethereum introduced a mechanism for the systematic destruction of part of the transaction fees. Although this update aims to make Ethereum deflationary, its impact is minimal during periods of low activity. Thus, the drop in activity has brought Ethereum back to its inflationary nature.

First anniversary for EIP 1559

In a few days, I‘EIP 1559 will celebrate its first birthday. Deployed on August 5, 2021, on the occasion of the hard fork londonEIP 1559 introduced a change to the fee mechanism on Ethereum.

In addition, this EIP also provides a mechanism for systematic destruction of part of the transaction fees. When it was introduced, it was the scene of many debates.

Thus, a portion of the costs entitled base fee, is systematically destroyed by the protocol. The objective, being to eventually make ETH deflationary. This will be done by having more ETH destroyed by the EIP 1559 than ETH issued by the protocol.

However, the destruction of ETH is obviously a function of the activity on the chain. Therefore, the more activity there is, the greater the number of ETH destroyed. Conversely, the lower the activity, the lower the number of ETH destroyed.

Deflationary Ethereum: not for now

In the first few months following the rollout of EIP 1559, Ethereum actually experienced several deflationary periods.

A total of 2.5 million ETH, or more than $4 billion in ether was destroyed by the protocol. In practice, this represents a 53% reduction in ether emission.

EIP 1559 statistics since deployment – ​​Source: WatchTheBurn.

However, the fall in the price of cryptocurrencies, including that of ETH, has led to a drop in the cost of transactions. While this is good news for all network users, it has had a negative impact on the deflationary nature of ETH.

Thus, the cost of gas fell to levels that had not been recorded since May 2020. This subsequently exploded in parallel with the rise of DeFi.

Indeed, as pointed out Checkmateyanalyst at Glassnode, the amount of ETH destroyed now only represents 11% of the ETH issued during the block creation process.

Issuance of ETH in the face of the destruction of EIP 1559.
Issuance of ETH in the face of the destruction of EIP 1559.

Gas prices for #Ethereum are at multi-year lows, now returning to May 2020 levels. As a result, ETH burned by EIP1559 has reached an all-time low. Thus, only 11% of ETH issued was burned. ETH has never been so inflationary since the launch of EIP1559. »

>> Ether fluctuates, that’s also why we love it! Embark on the FTX reference platform (commercial link) <<

A trend that will change after The Merge

At the same time, the Ethereum network is preparing for a major update via the merger, also called The Merge.

This update mainly aims to change the consensus mode of the network. Thus, it will move from the current Proof of Work to Proof of Stake.

However, this will also have an impact on the number of ETH that will be issued daily by the network.

Indeed, as explained on the official Ethereum website, theThe number of ETH issued daily will be reduced by 90% after The Merge :

  • About 13,000 ETH are produced every day in Proof of Work;
  • Around 1,600 ETH will be produced every day in Proof of Stake.

Therefore, the effective emission reduction via block production coupled with the destruction mechanism of the EIP 1559 should cause the network to be deflationary.

At an average gas price of at least 16 gwei, at least 1,600 ETH is burned every day, effectively bringing net ETH inflation down to zero or even less after the merger. »

For this, however, we will have to wait for the deployment of The Merge. In practice, this is currently being tested through various Ethereum testnets and could be deployed on the mainnet on September 19th.

Take advantage of the opportunities to buy low-cost cryptos that the market offers us! To not miss the opportunity of a lifetime, register without delay on the FTX reference crypto exchange platform. In addition, you benefit from a lifetime reduction on your trading fees (commercial link, see conditions on official website).

Leave a Comment