Ethereum deflation? "London", Staking and DeFi curb Ether supply

Three weeks after the hard fork “London”, the first effects of EIP-1559 are becoming noticeable. However, other developments in the network are also contributing to the shortage of Ether stocks.

The crypto market is putting the red pen to the weekend. The total market capitalization slumps 2.4 percent from the previous day, melting the lead above the $2 trillion mark to $68 billion. After a brilliant start to the week, in which the bitcoin price put out feelers above USD 50,000 for the first time in a long time, the cryptocurrency is also losing ground. At the time of writing, the BTC price is trading at 46,892, down 2.1 percent. However, in the 30-day trend, the largest cryptocurrency is doing quite well with a gain of 20 percent.

Ethereum deflation? "London", Staking and DeFi curb Ether supplyEthereum deflation? "London", Staking and DeFi curb Ether supplyEthereum deflation? "London", Staking and DeFi curb Ether supply

The picture is similar for No. 2: Ethereum is down just under two percentage points on the day, sliding to $3,101. However, things are also looking quite good for the second-largest cryptocurrency from a macro perspective, with the monthly counter posting a 35 percent increase in value. A major part of this was due to the August 5 hard fork “London”, which introduced a token burn mechanism and a fee model based on block usage with the “improvement upgrade” EIP-1559. Expectations were high, as evidenced in no small part by a small pre-market rally. Some three weeks later, the effects of EIP-1559 are also already showing their impact.

London’s Burning: Over 100,000 Ether Burned Since Hard Fork

Since the London hard fork, a new fee system has been in place on Ethereum. These have been unified into a base fee, while the block size has been doubled from 12.5 million to 25 million gas units. By increasing the potential block utilization, which should hold a 50 percent utilization rate as an average, fees on the network should drop significantly during normal operation. But it’s not just user experience that should be impacted by the upgrade. A very decisive side-effect is the throttling of the following offer quantity. This is because the fees do not flow to miners as before, they are “burned”, i.e. withdrawn from circulation.

This deflation effect can already be observed. Around 106,000 Ether have now been destroyed, according to oklink. But it’s not just EIP-1559 that is causing an Ether shortage. Nearly seven million Ether are now stranded in the Deposit Contract, the “staking pot” of <a href=”https://beaconcha.in/” target=”_blank” rel=”noopener”>Ethereum Beacon Chain, and thus also disappeared from the circulating supply – at least temporarily. They are not destroyed, but the staking trend, which gives a foretaste of the expected hype at the Ethereum 2.0 launch, is causing a throttling on the market. On top of that, exchange reserves are also falling. With 15.5 million Ether available, exchange reserves are currently hovering around November 2018 levels.

Gas Fees: No relief in sight (yet)

In contrast to the supply volume, the hard fork has not yet really made itself felt in gas fees. These have indeed normalised considerably compared to the first half of the year. Nevertheless, they have increased since London from an average of 64 Gwei to the current 97 Gwei.

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This is primarily due to the reignited hype in the NFT market, which is largely taking place on the Ehereum blockchain. One fifth of all gas fees are currently accounted for by the NFT trading platform Opensea, which has seen peak trading volumes of over USD 200 million in recent days.

The largest share is accounted for by NFT’s Art Blocks project, which alone is responsible for $254 million in trading volume over the past seven days.

Ethereum hash rate record high

Miners therefore cannot complain about falling revenues. While it was still assumed in connection with the fee destruction by the hard fork that there would be a pay cut at the “Ether graves”, it can be seen that the miners’ revenues have hardly changed since then.

The fact that speculation about an incipient retreat of the miners, who will finally be sent into retirement at the latest with the final conversion to Ethereum 2.0, proves to be groundless, is also shown by looking at the computing power in the Ethereum network. The hash rate hit a new record high of 622 terahashes per second (TH/s) just yesterday.

Last but not least, the DeFi market, where the current Total Value Locked (TVL) of $82 billion is just five billion away from the all-time high, is contributing to Ethereum growth. 9.8 million Ether are currently locked in DeFi logs, which, along with fee destruction, the staking trend, and declining exchange holdings, should be priced into price performance over the long term.

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