According to data provided by cryptocurrency analytics company Glassnode, the annualised daily net inflation rate of the Ether (ETH) supply fell to a historic low of -2.772% last Tuesday. The Ethereum blockchain, which supports smart contracts and is now the largest blockchain in the world in terms of the scale of its connected ecosystem of decentralised applications, is powered by the Ether token. By market capitalization, Ether is the second-largest cryptocurrency.
Since then, Ether’s net inflation rate has climbed, reaching -1% as of Sunday. But during the past month, a distinct tendency has emerged. The rate at which the quantity of ether is declining, or deflating, is quickening. And if present patterns in Ethereum network activity continue, that deflation rate might increase much more, a development that many analysts believe would be positive for the price of ETH.
How Faster ETH Deflation Is Caused by Rising Gas Prices
The gas price on the Ethereum network reportedly reached a seven-month high of 64 Gwei, according to Glassnode. The value of 1 Gwei is 0.000000001 ETH. The Gwei Gas Price is multiplied to determine the minimum gas fee (in Gwei) that a user must pay for a transaction.
As a result, customers had to pay a minimum of 1,344,000 Gwei, or 0.001344 ETH, every transaction on last Tuesday when the price of gas reached 64 Gwei. Based on the closing price of Ether on Tuesday, that comes to about $2.10. The price of gas had decreased to about 30 Gwei by Sunday, which equated to a transaction cost of 0.00063 ETH, or about $1.06 based on the closing price of Ether on that day.
The rate at whichh the Ether supply is burnt directly correlates with a growing gas price (expressed by a rise in Gwei). We must immediately comprehend the operation of the Ethereum network charge structure before we can comprehend why. There are two parts to network fees. First, all users must pay a base fee to ensure that their transaction is approved.
Then, users have the option of leaving a gratuity to expedite the processing of their transaction. The basic fee is automatically calculated by the Ethereum network and increases during periods of high network activity. All of these base fees paid by users must then be burned in accordance with Ethereum Improvement Proposal (EIP) 1559, which was incorporated into the Ethereum code during the London hardfork in August 2021. This will eliminate the tokens from circulation forever.
As a result, when the base gas fee increases, ether is burned at a faster rate. The red bars in the above graph show the ETH burn rate as a result of EIP 1559, which illustrates this. When this burn rate rises over the rate at which ETH is issued, which is roughly 0.55%, the ETH supply will decline. ETH is issued to the nodes and stakers that secure the Ethereum network.
The ETH Deflation Rate Could Accelerate Further
The rate of ETH deflation might increase.
There are indications that Ethereum network traffic has been increasing this year, and this trend may continue, putting additional upward pressure on gas prices and consequently raising the burn rate for ETH. DeFi Llama estimates that the trade value locked (TVL), or total amount of capital locked within smart contracts on the Ethereum network, was recently about $54 billion, up from roughly $35 billion since the year’s beginning.
The Increase in cryptocurrency values may help to partially explain this. Nonetheless, ETH-denominated TVL has increased from 31 million at the start of the year to approximately 32.3 million.
