annualized daily net inflation rate of ether According to data provided by crypto analytics firm Glassnode, (ETH) supply hit a record low of -2.772% last Tuesday. Ether is the token that powers smart-contract-enabled Ethereum blockchain, which is currently the world’s leading blockchain in terms of the size of the corresponding ecosystem of decentralized applications. ether It is the second largest cryptocurrency by market capitalization.
The net inflation rate of Ether has risen to around -1% as of Sunday. But there has been a clear trend over the past month. The rate at which the supply of ether is falling, or being reduced, is accelerating. and if in current trend activity Ethereum The network continues, that the deflation rate could accelerate further, which many analysts believe will be bullish for ETH price.
How high gas fees accelerate ETH deflation
According to Glassnode, the price of gas on the Ethereum network reached a seven-month high of 64 GVE. 1 Gwei is equal to 0.000000001 ETH. the minimum gas fee (Named in Gwei) that a user needs to pay for a transaction is calculated by multiplying the Gwei gas price by the gas limit, which is currently 21,000.
This means that, last Tuesday, when the gas price reached 64 Gwei, users had to pay a minimum of 1,344,000 Gwei, or 0.001344 ETH, per transaction. Based on the closing price of Ether last Tuesday, this is approximately $2.10. As of Sunday, the gas price had dropped to around 30 Gwei, which means a transaction fee of 0.00063 ETH, roughly $1.06 based on Sunday’s closing Ether price.
The rising gas price (as represented by an increase in Gwei) is directly related to the rate at which the supply of Ether burns. Before we understand, we should quickly understand how the Ethereum network fee 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 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. This can be seen in the chart above – the red bars represent the ETH burn rate as a result of EIP 1559. 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.
ETH deflation rate could accelerate further
There are indications that activity on the Ethereum network has been on the rise this year, and may continue to do so, creating further pressure on gas fees and thus further increasing the ETH burn rate. According to DeFi Lama, the total amount of capital locked within smart contracts on the Ethereum network, or Trade Value Lock (TVL), was about $54 billion, up from about $35 billion since the start of the year.
This can be partly explained by the rise in crypto prices. But ETH-denominated TVL is up from 31 million at the beginning of the year to around 32.3 million. Meanwhile, although the number and volume of ETH transactions on the Ethereum network has remained largely stable over the past year, the number of so-called internal smart contract calls (calls initiated from within an already executed smart contract), has increased in recent months. has been trending higher, indicating an increase in network smart contract activity.
Ether is up nearly 42% on the year, and if crypto prices continue to rise, Ethereum network activity levels can be expected to continue to rise, as investors turn to decentralized finance (DeFi) amid improving market sentiment. ) come back. High network congestion pushed the daily annual ETH (EIP 1559) burn rate to 6.0% in early 2022.
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 only reached its maximum level of around 1.5%.
But if the EIP 1559 burn rate returns to its early 2022 high, the deflation rate for Ether could reach 5.5%. It is impossible to predict the future path of Ethereum network gas fee and ETH burn rate. But one thing is certain, the fact is that ETH is a deflationary asset that will reduce its price performance in the years to come. With DeFi adoption picking up and bitcoin supply still growing at around 2% per year (until the next halving in about a year and a half), many analysts believe that ETH has the potential to overtake BTC in terms of market capitalization. There is a good chance to catch up or even surpass. capitalization.
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