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Ethereum supply deflates as its gas fees increase



There has been a recent increase in gas fees that have increased Ethereum’s deflationary blocks. This also increased the ETH burn rates and led to 800 more deflationary blocks. This comes barely a few days after the Ethereum’s London upgrade that happened a week ago.

So far, there have been two hours of deflationary supply due to an increase in the transaction fee burn rate. There is more gas being burned due to network congestion in the past few days.

According to ETH Burn Bot on Twitter, there are up to 545 Ether (ETH) that was burned in an hour at 22:00 UTC. At the same time, Ethereum was being issued at the rate of 532 ETH per hour leading to deflation of minus 13 ETH in that period.

This triggered a higher deflationary burn where up to 945 tokens were burned in an hour leading to -417 ETH. A combination of these two led to an annualized deflation rate of -3.12%.

The deflation effect

When the mining reward is less than the ETH burned, that means there is a deficit and hence a deflationary block gets produced which reduces the supply.  Carbono, an advisory firm, announced that there are up to 791 deflationary blocks so far.

The London hard fork on Thursday adjusted the transaction fee calculation process through the Ethereum Improvement Proposal (EIP) 1559 upgrade. From the adjustments, there is a part of the base fees collected that will be burned. Currently, there is ETH that has already been burned. According to ultrasound.money, there are up to 25,600 ETH that has been burned. This is the equivalent of $80 million.

Proof-of-stake is the only hope for sustaining deflation. This will ensure that there is a balance of fee burning and reduction in block reward issued. This is, however, likely to happen in 2022.

What does that mean?

When the gas prices increase it means that there is an increase in the transaction fees. The fees have increased from $4 to $20 in a month. Despite the high transaction costs, Ethereum blocks continue to experience a surge in demand. This has mainly been driven by the NFT world as they do the majority of the gas burning. NFT marketplaces such as OpenSea marketplace, Gala Games’Vox, and Axie Infinity lead the band in gas-burning as they have burned an equivalent of $7 million already. 

Photo by Firmbee.com on Unsplash



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