For the first time, more Ether was burned in one day than miners produced. The deflation effect could contribute to Ethereum’s performance.
A month after “London,” the hard fork is starting to take effect. Last Friday, Ethereum’s inflation rate tipped into negative territory for the first time. Or in other words, more Ether was burned that day than new coins were added in the form of Block Rewards. This imbalance is tightening the lagging supply and in that respect could prove to be a major price catalyst in the coming months – assuming demand remains high.
London turns Ethereum supply on its head
On August 5, hard fork London tinkered with the fee mechanism on Ethereum. The EIP-1559 implemented with the upgrade introduced a base fee for Ether transactions that is calculated based on block utilization. If the network is heavily utilized, the gas fees increase. The same is true in the opposite direction, if the utilization is low, the cost decreases. At the same time, the maximum block utilization has also been doubled to 25 million gas units. This should ensure that fees settle at an affordable level even at peak times.
However, quite crucially, the fees are not remitted to miners as before, but have been burned since the hard fork. This slows down the Ether inflow: the inflation rate flattens. If the block utilization increases due to an increased transaction volume, more base fees fall victim to the combustion mechanism, which can exceed the additional compensation of the miners of currently 2 Ether per block.
NFT hype as combustion engine
This deflationary effect first occurred last Friday. According to Etherscan, 13,838 Ether were burned on that day alone. In contrast, Supply grew by 13,505 ETH – A decrease of 303 ETH. Of the Ether burned, around 2,000 ETH was accounted for by NFT trading platform OpenSea alone, which remains the largest gas-fee consumer on the Ethereum network.
This phenomenon could become even more common in the future if the hype in the NFT and DeFi markets persists and ensures continued high network utilization. This should result in positive effects for the price development. The curbing of the circulation volume inevitably drives up the Ether price. In addition, staking and inclusion in DeFi applications are increasingly throttling supply. As a result, the Ether price has already risen 46 percent since the hard fork on August 5. At press time, the second-largest cryptocurrency is trading at $3,912. In the sameDuring the same period, 214,000 ETH fell victim to the combustion mechanism.