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Although not deflationary yet, Ethereum continues to burn enormous amounts of ETH, hitting the 1 million milestone last week.
Ethereum continues to burn supply
EIP-1559 was one of the most controversial and anticipated Ethereum Improvement Proposals in the blockchain’s history. Most importantly, it changed how gas fees are calculated, introducing a burn mechanism that would see a small share of the ETH paid for each transaction burned to limit the issuance of new ETH.
While much has been made of this mechanism, it has undoubtedly succeeded at the one thing it was definitely supposed to do: burning Ether. Blockchain research firm CryptoRank found that over 1 million ETH (worth almost $6 million AUD) has been burned since EIP-1559 was introduced in August.
The biggest contributors, or rather the biggest gas guzzlers since the introduction of EIP-1559, have been popular NFTs, OpenSea (an NFT trading platform), play-to-earn games like Axie Infinity, and decentralised exchanges like Uniswap, 1inch, and Sushiswap. Another significant gas guzzler are stablecoins like USDT and USDC.
7.67 ETH is burned per minute, amounting to over 11,000 ETH burned per day. However, even with all this burning going on, Ethereum remains slightly inflationary on an annual basis. True, the network saw its first consecutive weeks of negative supply issuance, but it’s currently on track to inflate 1.2% on an annualised basis. However, that far beats current inflation rates of fiat currencies and is even lower than the current inflation rate of Bitcoin.
Where is the supply of Ether going from here?
EIP-1559 has been controversial for many reasons, not least because many hoped it would do away with the crazy spikes in gas fees that have become a staple of Ethereum. Even though EIP-1559 was never supposed to “fix gas fees,” there was hope it would at least smooth gas fee bonanzas. Alas, that has not happened.
While Ethereum proponents respond to this with a “deal with it” attitude and point to the amount of innovation and developer activity on Ethereum that continues to remain unmatched by other chains, opponents suggest Ethereum’s throne as the smart contract leader may be at danger if updates don’t alleviate network congestion.
Ethereum 2.0 will see the Ethereum mainchain transition from proof-of-work to proof-of-stake in what is dubbed The Merge, and lay the foundation to connect the Ethereum Beacon Chain to its sharded chains over the next few years. In terms of Ether supply, that will be excellent news. Ultra Sound Money, an Ethereum research project, predicts the peak supply of Ether to top out at around 120 million in 2022, followed by a slow but continuous decline as Ether becomes deflationary.
Whether this will fix Ethereum’s usability issues is still to be determined. Most probably, gas fees on the Ethereum mainchain are only going up from here as the network’s popularity continues to increase. In this scenario, Ether would eventually morph into a store of value that is backed by network usage on its sharded chains and layer-two solutions. Not the worst prospect for investors, but you might want to stock up on Ether while you still can.