For the first time, more ether was burned in one day than miners produced. The deflation effect could contribute to Ethereum’s performance.
One month after “London” the hard fork begins to take effect. Last Friday, Ethereum’s inflation rate turned negative for the first time. In other words: On that day, more ether was burned than new coins were added in the form of block rewards. This imbalance reduces the upward trend in supply and could therefore prove to be a major price catalyst in the coming months – if demand is high.
London is turning the Ethereum offering on its head
On August 5th, the Hard Fork London put the fee mechanism at Ethereum in its hands. The EIP-1559 implemented with the upgrade introduced a basic fee for Ether transactions, which is calculated on the basis of the block utilization. If the network is full, the gas charges increase. The same applies in the opposite direction, with low utilization the costs decrease. At the same time, the maximum block utilization was doubled to 25 million gas units. This is to ensure that the fees are affordable even at peak times.
However, it is very important that the fees are not transferred to the miners as before, but have been burned since the hard fork. This slows down the flow of aether: the inflation rate flattens out. If the block utilization increases due to an increased transaction volume, further basic fees fall victim to the combustion mechanism, which can exceed the additional remuneration of the miner of currently 2 ethers per block.
NFT hype as a combustion engine
This deflation effect first appeared last Friday. According to Etherscan, 13,838 ethers were burned on this day alone. In contrast, the supply grew by 13,505 ETH – a decrease of 303 ETH. Of the ethers burned, around 2,000 ETH were accounted for by the NFT trading platform OpenSea, which is still the largest consumer of gas fees in the Ethereum network.
This phenomenon could occur even more frequently in the future if the hype surrounding the NFT and DeFi market continues and ensures continued high network utilization. This should have a positive effect on the price development. The throttling of the amount in circulation inevitably increases the price of ether. In addition, staking and integration in DeFi applications are increasingly reducing the offer. Ether price has risen 46 percent since the hard fork on August 5th. At press time, the second largest cryptocurrency is trading at $ 3,912. In the same period, 214,000 ETH fell victim to the combustion mechanism.