The rate at which the Ether supply is reduced has recently reached its highest level this year. On Wednesday, the annualized EIP-1559 burn rate surpassed the ETH issuance rate by 1.425%, the highest since the anomaly last May, when deflation rose above 17% in just one day.
When the deflation rate increases, it means that individual ETH tokens are becoming scarce at a faster rate. Most analysts believe this will boost cryptocurrency prices in the long run.
However, traders don’t appear to be paying much attention to recent developments in ETH’s deflationary rate, as ETH/USD experienced a nearly 5.0% drop on Friday amid concerns over crypto bank Silvergate and reports of Tether committing fraud to maintain access. Falling global banking system.
ETH/USD is currently trading around $1,570, down around 10% from recent highs of $1,700. While ETH may have fallen since early February, its deflationary rate certainly has not. In fact, it appears to be trending upwards.
Traders should keep in mind that deflation is a potential talking point that could boost ETH later this year. Other themes that could also boost Ethereuminclude network upgrades, the launch of pledged ETH withdrawals next month, a potential DeFi revival, and a potential improvement in the macro backdrop, provided a U.S. recession is avoided and falling inflation gives the Fed room to cut rates .
What Is Driving Accelerated Eth Deflation?
Before we can answer the question of what drives ETH’s deflation rate up, we need to understand why ETH’s deflation occurs, and this requires an understanding of how the Ethereum network fee structure works.
Network fees are divided into two parts. The first is a base fee that all users must pay to ensure their transactions are accepted and processed on the blockchain. Then there is an optional tip that users can pay to get their transactions processed faster.
The Ethereum network automatically calculates a base fee that increases during times of high network traffic. The Ethereum Improvement Proposal (EIP) 1559 was implemented into the Ethereum code in a London hard fork in August 2021, requiring all of these base fees paid by users to be subsequently destroyed, thereby taking the tokens out of circulation permanently.
As a result, when the base gas fee goes up, so does the burn rate of Ether. When this burn rate exceeds the ETH issuance rate (~0.55%), the ETH supply will drop. ETH is issued to nodes and stakeholders that secure the Ethereum network. The chart below shows how the (base) gas fees on the Ethereum network have gradually increased in recent months.
ETH Deflation Rate May Accelerate Further
High network congestion continues to drive daily annualized ETH (EIP 1559) burn rates as high as 6.0% in early 2022. At the time, the Ethereum blockchain was still powered by an energy-intensive proof-of-work consensus mechanism, and, due to the much higher energy bills and mining machine costs incurred by the miners powering the network, the issuance rate of Ethereum was much higher, About 4.4-4.6% per year.