the rate at which ether (ETH) supply deflation, which has been accelerating in recent weeks, has recently seen an uptick. Ether is the cryptocurrency that powers smart-contract-enabled Ethereum blockchain. ETH is the second most valuable cryptocurrency in the world by market capitalization and Ethereum is the leading blockchain in it. decentralized finance,
Last Saturday, resulting in annual burn rate Ethereum Improvement Proposal 1559 reached its highest level since last May at 5.679%, surpassing ether The issuance rate rose by 0.578% to 5.101%. Since then the deflation rate has fallen to around 1.75% on Wednesday 15th of March.
Cryptocurrency markets saw extreme volatility late last week and earlier this week amid uncertainty related to the collapse of a major regional US bank and last week’s series of policymaker responses. ether After reaching multi-month highs above $1,700 earlier this week, the upper-$1,600s were changing hands on exchanges for the last time.
The spike in ether burn rate came amid a jump in the price of ethereum gas charged to users of the network at its highest level since last May. If the demand for the Ethereum network continues to increase, leading to an increase in network congestion, the Ethereum gas fee will further increase, which will translate to further accelerating the cryptocurrency’s deflation rate. An accelerated deflation rate is likely to be a long-term headwind for ETH price.
Explainer – What is the accelerated ETH deflation rate?
Before answering the question why ETH deflation rate is increasing, we need to understand why ETH deflation occurs and for this we need to understand how ethereum network fee the structure works. 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 August 2021 London hardfork, 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.