Ethereum annual inflation drops by 35% with the burning of ETH

According to recent data from Coin Metrics, the annual net inflation of ethers (ETH), Ethereum’s native cryptocurrency, has slowed to levels hovering around 1% and 3% as a result of the token burn implemented last August 5 with the London fork.

Etherscan statistics indicate that since that date (and as of this writing) a total of 173,407 ETH worth over USD 650 million have been burned. With this amount, the annual issuance of the network’s coins has been reduced by more than 35%, the rate of which used to increase by 5% every year, as stated by The Block Research data

.

The Coin Metrics team agrees with this analysis, noting in its report this week that in the nearly 30 days since the update

there have been times when the amount of ethers (ETH) burned managed to exceed the amount of coins issued. A fact that is taken as a deflationary signal, as the number of tokens in circulation decreased.

The deflationary trend became noticeable just a few days after the hard fork, as this media outlet reported

at the time, but it has become more evident in recent weeks. This occurs because the burning of base rates permanently removes it from the circulating supply, canceling part of the new supply.

To clarify their metrics, Coin Metrics states that, if the ratio of total ETH issued to total ETH burned is less than 1, it means that more ETH is burned than is issued. This level has been reached at various times after the activation of the EIP-1559 upgrade proposal, as seen in the graph embedded below.

The chart shows how the annual net inflation of ETH started to decrease from the first days of August, reaching levels below 1 by the end of August.

Ethereum annual inflation drops by 35% with the burning of ETH Ethereum annual inflation drops by 35% with the burning of ETH Prior to August 5 there was no token burning in Ethereum and the annual inflation rate is seen stable above 4%. With EIP-1559 the rate has reached below 1%. Source: Coin Metrics.

As previously discussed in

CryptoNews

, token burning was one of the most important changes introduced to Ethereum with the London fork. It is part of the new fee scheme that seeks not only to make the network deflationary, but also to lower the high fees.

This is how, starting with the activation of EIP-1559, two types of fees began to be handled: the base fee that is burned daily, and the priority fee that is paid to miners for faster processing of transactions per block.

As a result, the level of inflation on the Ethereum blockchain has been significantly reduced, as the data above shows. However, the same has not

been true for the amount of fees, the lowering of which could materialize in the longer term, with the activation of Ethereum 2.0.

Regarding the movements in the network, The Block draws attention to the boom in trading of non fungible tokens

(NFT).

Activity on the Ethereum blockchain remains high, with 1.18 million transactions per day (…) The network continues to move USD 9.11 billion in volume per day, and a total of over USD 260 billion per month.

The Block Research

All of this activity revolves primarily around the trading of digital collectibles. Coin Metrics talked about it a few weeks ago, saying that among the causes of the low issuance of some ETH blocks were NFT sales. Such sales initially generated a rise in base rates on Ethereum, but the subsequent token burn contributed to some of the ETH issuance turning negative.

While all of these trades contribute to the burning of base fees they also cause “gas rates to rise significantly, especially when NFT collections are being minted,” comments The Block.

Taking all these facts into account, Coin Metrics believes that overall the effects of EIP-1559 have been favorable, positively influencing both network decongestion and user experience. “While congestion leads to high gas prices and costly transactions, it also leads to the burning of a large amount of ETH, which is positive for the economics of supply,” he concludes.

Not all Ethereum wallets have implemented EIP-1559

In its weekly report Coin Metrics presents its calculations on priority (or tipping) fees

. It

claims that these types of fees have accounted for around 20-30% of Ethereum’s total daily fees.

Ethereum annual inflation drops by 35% with the burning of ETH Ethereum annual inflation drops by 35% with the burning of ETH The cantity of priority fees paid on Ethereum (in pink) is still small relative to the base fees, which are then burned (in green). Source: Coin Metrics.

The blockchain analytics firm notes that the percentage of priority fees is still low because more wallets are still expected to natively implement EIP-1559 transactions.

Although EIP-1559 was introduced through a hard fork and, as such, is mandatory for all network participants, there is still a mechanism within Ethereum nodes that converts legacy transactions to EIP-1559.

Coin Metrics

However, the Coin Metrics team notes an acceleration in the daily percentage of transactions using EIP-1559 versus the legacy fee mechanism. This, because the former have gone from accounting for 23% of transactions shortly after the hard fork

, to just over 40% by the end of August.

As such, the percentage of transactions based on the new fee mechanism is expected to continue to rise in the coming months as portfolios catch up to support the new format.