Faced with the fall of cryptocurrencies, Ethereum returns to being inflationary

ETH at stake – Last year, blockchain Ethereum introduced a mechanism for the systematic destruction of part of the transaction fees. While this update aims to make Ethereum deflationary, its impact is minimal during times of low activity. Therefore, the decline in activity has returned Ethereum to its inflationary nature.

First anniversary for EIP 1559

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

Furthermore, this EIP also provides a mechanism for systematic destruction of part of the transaction fees. When it was introduced, it was the scene of much debate.

Thus, part of the expenses are entitled base rate, it is systematically destroyed by the protocol. The goal, ultimately, is to make ETH deflationary. This will be done by having more ETH destroyed by the EIP 1559 than the ETH issued by the protocol.

However, the destruction of ETH is obviously a function of the activity on the chain. Therefore, the greater the activity, 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 launch of EIP 1559, Ethereum actually experimented different 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 from distribution – Source: WatchTheBurn.

However, the drop 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 users of the network, it has had a negative impact on the deflationary nature of ETH.

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

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

Issue of ETH in the face of the destruction of EIP 1559.
Issue 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, EIP1559’s burned ETH hit an all-time low. Therefore, only 11% of the ETH issued was burned. ETH has never been more inflationary since the launch of EIP1559. “

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A trend that will change after The Merge

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

This update is primarily aimed at changing the consent mode of the network. Therefore, it will switch from the current Proof of Work to Proof of Stake.

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

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

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

Therefore, the actual reduction of emissions through block production, coupled with the destruction mechanism of the EIP 1559, should lead to deflation of the network.

At an average gas price of at least 16 gwei, at least 1,600 ETH are burned every day, effectively bringing net ETH inflation 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 across various Ethereum and could be rolled out to the main network on September 19th.

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