- Ethereum has enjoyed its first deflationary period since its Proof-of-Stake switch
- Last August’s EIP-1559 upgrade kick started the delfationary aspect of the Ethereum 2.0 upgrade
- The deflation rate cannot overcome bear market dynamics, but it should help price if it continues
Ethereum has enjoyed its first spell as a deflationary currency, with more ETH being burned since the weekend than was being created. This bears out the intentions of the EIP-1559 protocol that was introduced last year and shows that, with its new Proof-of-Stake format, Ethereum can indeed become a deflationary currency over time, especially when the full upgrade is rolled out over the coming months.
EIP-1559 Ushered in Deflationary Aspect
Ethereum’s potential as a deflationary currency has been in the works ever since EIP-1559 was implemented in August last year, although with Ethereum still adopting a Proof-of-Work consensus mechanism at the time it wasn’t possible to take advantage of this feature. With Ethereum now having moved to a Proof-of-Stake mechanism it is much better placed to take advantage of the feature.
EIP-1559 changed the way that miners were rewarded for mining Ethereum before the switch, with a portion of every gas fee being destroyed in order to automate transaction prices and limit the supply of ETH.
Deflation Rate Can’t Overcome Bear Market
Over the weekend the cost and volume of gas fees started burning more ETH than was being created via staking – the post-merge process by which ETH is now generated. Since then, the total amount of ETH in circulation has dropped by 4,001 ETH and counting, with the rate of burning still continuing to outpace the rate of ETH creation.
This would be, in theory, good news for holders, with the $155 billion market cap becoming more concentrated, but such dynamics don’t take market dynamics into account, and the rate of deflation is nowhere near big enough to reverse the crippling impact of a bear market. When things do turn around however, a fully deflationary ETH could be a very good buy indeed.