For the first time, more ether was burned in one day than miners produced. The deflationary effect could add to Ethereum’s performance.
One month after “London” the hard fork is starting to take effect. Last Friday, Ethereum’s inflation rate turned negative for the first time. Or to put it another way: On that day, more ether was burned than new coins were added in the form of block rewards. This imbalance reduces the supply volume that is coming up and could therefore prove to be a major price catalyst in the coming months – provided there is high demand.
London turns Ethereum supply upside down
On August 5th, the Hard Fork London laid hands on the fee mechanism at Ethereum. The EIP-1559 implemented with the upgrade introduced a basic fee for Ether transactions, which is calculated based on the block utilization. If the network is busy, the gas fees increase. The same applies in the opposite direction, with low utilization the costs are reduced. At the same time, the maximum block utilization was doubled to 25 million gas units. This is to ensure that the fees settle at an affordable level even at peak times.
However, it is very important that the fees are not transferred to miners as they were before, but have been burned since the hard fork. This slows down the flow of ether: the inflation rate flattens out. If the block utilization increases due to an increased volume of transactions, more basic fees fall victim to the combustion mechanism, which can exceed the miner’s additional remuneration of currently 2 ethers per block.
NFT hype as a combustion engine
This deflation effect occurred for the first time last Friday. According to Etherscan, 13,838 ethers were burned on that 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 gas fee consumer in the Ethereum network.
This phenomenon could occur even more frequently in the future if the hype on the NFT and DeFi market persists and ensures continued high network utilization. This should have positive effects on the share price development. The throttling of the amount in circulation inevitably increases the price of ether. In addition, staking and integration into DeFi applications are increasingly reducing the supply. The ether price has risen by 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.