Post-“Shapela” Upgrades Optimism that briefly lifted ether (ETH) price that hit an 11-month high in the mid-$2,150s earlier this month has mostly faded.
etherThe token that powers smart-contract-enabled Ethereum The blockchain last traded near $1,900, still up nearly 4% for the month, but down 11% from the previous monthly peak.
Despite the fact that ETH has been taking a breather over the past few weeks, analysts remain optimistic on the medium to long-term prospects of the cryptocurrency.
This is partly because macro conditions keep changing in favor of blue-chip (high market capitalization, high trust) cryptocurrencies. Bitcoin And Ethereum,
Bank crisis concerns persist First Republic just entered into FDIC receivership And this Fed’s tightening cycleAlthough there is still some way to go, it looks like it is going to be over soon.
This means that blue-chip cryptos will continue to benefit from 1) safe-haven demand as an “alternative” form of money and 2) easier financial conditions (i.e. lower US dollar and US bond yields).
But unlike bitcoin, ether can also count on the support of two major deflationary tailwinds that are likely to drive significant price upward moves in the coming years.
ETH Supply Deflation Rate Keeps Growing
the rate at which The supply of ether is deflating The uptrend continues.
On Thursday, the annualized EIP-1559 burn rate surpassed the ETH issuance rate of 1.753%, a week after the deflation rate hit its annual peak of 3.933% nearly a week ago.
According to chart data presented by crypto analytics firm Glassnode, the net inflation rate has been more or less negative every day since late January.
When the deflation rate increases, it means that individual ETH tokens are becoming scarcer at a faster rate. Most analysts believe that this should boost the price of the cryptocurrency in the long run.
Increasing deflation is associated with increasing rate of ethereum network fee,
Network charges are divided into two components. The first is the base fee that all users must pay to ensure that their transactions are accepted and processed on the blockchain.
Then there is an optional trick that users can pay to process their transactions more quickly.
The Ethereum network automatically calculates a base fee, which increases during times of heavy network traffic.
Ethereum Improvement Proposal (EIP) 1559, which was implemented into the Ethereum code in the London hardfork in August 2021, requires that all of these base fees paid by users are then burned, permanently removing the token from circulation. be removed
As a result, when the base gas charge increases, the ether burning rate also increases.
When this burn rate exceeds the ETH issuance rate, which is around 0.55%, the ETH supply will decline.
ETH is issued to the nodes and stakers that secure the Ethereum network.
The supply of unstaked ETH tokens is falling rapidly
The price of (unstaked) ETH is also likely to benefit from the sharp drop in supply as more and more investors stake their ETH tokens to secure the yield.
The recent “Shapela” upgrade enabled withdrawals of unstaked ETH tokens (at a maximum rate of 50,400 ETH tokens per day) for the first time since staking was introduced on the Beacon chain in December 2020.
As a result of the recently added flexibility to ETH staking, investors are depositing their ETH tokens into staking contracts at a faster rate than the 50,400 ETH token withdrawal limit.
According to data presented by Glassnode, the number of ETH tokens staked reached a new all-time high of over 19.5 million on Thursday, up from about 1.5 million on the month.
Given the current ETH supply of around 120.4 million, this means that just over 16% of the coins are currently at stake.
This is well below other comparable proof-of-stake layer-1 blockchains such as Cardano, which typically have a participation rate of 60-70% of the supply chain.
As more ETH tokens are locked into staking contracts, where they are stuck behind the withdrawal limit of 50,400 ETH tokens per day, the supply of readily available (unstaked) ETH tokens in the market declines, increasing the shortage.
Theoretically, this should increase the price of ETH.
Both deflationary tailwinds are set to lift
It is reasonable to expect that the ETH staking participation rate could rise to 40-50% in the coming years, meaning hundreds of millions of (unstaked) ETH tokens are being removed from supply immediately.
Meanwhile, history suggests that Ethereum transaction fees and burn rates can be even higher, causing the ETH supply deflation rate to rise exponentially in the process.
In early 2022, high network congestion pushed the daily annualized ETH (EIP 1559) burn rate up to a steady 6.0%.
At the time, the Ethereum blockchain was still powered by a very energy-intensive proof-of-work consensus mechanism and as a result of the very high energy fees and miner rig costs incurred by the miners operating the network, the issuance rate of Ethereum per year was low. was very high at around 4.4-4.6%.
This means that the deflation rate of Ether reached a maximum of around 1.5%.
However, if a resurgence in the broader crypto and DeFi market could send the EIP 1559 burn rate back to its early 2022 high, then the new very low ETH issuance rate (in the 0.5-0.6% area) means that Ether is deflationary. The rate can jump to a staggering 5.5%.
It is worth noting that, eventually, an upcoming Ethereum blockchain upgrade (perhaps later this year or in 2024), which includes the implementation of sharding, should reduce transaction fees to keep this deflation rate under control.
The winds of double inflation could mean that Ether outperforms Bitcoin during the upcoming crypto bull market.
If bitcoin rises 5x from current levels to $150,000 in the coming years, as many expect, does this mean ether could rally to $10,000 6x or 7x? Is?