As Ethereum Price Suffers, Investors Wonder If ETH Can Become Deflationary
Ethereum has not been left out of the onslaught currently happening in the market. The coin has lost over 2.4% in the last 24 hours and is now trading in the $1,700 territory as of the time of writing this article. The digital asset continues to dip as the crypto market continues to experience massive losses.
Ethereum has now lost over 50% from its all-time high in April when the coin had shot past $4,000. Holders continue to remain bullish on the coin as upgrades promise new and exciting things in the future of the digital asset. The coin continues to experience growing anticipation in wait for the move to ETH 2.0.
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But now a whole other question has arisen in regards to Ethereum, and that is if the digital asset will ever become deflationary.
Unlimited ETH Supply
Given the structure of Ethereum, it is not a stretch to say that the digital asset does not possess any hard cap. The network is structured that for every new block created, two ETH coins are produced. Then this means that as long as people continue to use the network, then more ETH coins will continue to be created.
An unlimited supply of any currency or asset puts that asset or currency at risk for inflation. Thus, Ethereum’s model remains an inflationary one due to there being no cap on the overall supply of ETH.
This is currently the model that Ethereum runs on. But with the scheduled EIP-1559 network upgrade, this means that the network’s entire monetary policy might be changing.
The upgrade is meant to curb this inflationary problem. With the EIP-1559 comes a fee-burn mechanism. This mechanism will ensure that an estimated 30% of transaction fees generated will go to the miners or validators in ETH 2.0. Then the other 70% of the transaction fees will cease to exist, or in easier terms, the coins will be burned.
This means that instead of two new ETH coins being produced for each new block created and adding to the current Ethereum supply on the market, the base network fees will be going towards removing them entirely.
What This Means For Ethereum
This mechanism will reduce the number of new ETH coins coming into the market and getting sold. It will drastically reduce the supply of new coins, hence trying to make the digital asset deflationary.
This mechanism works and adjusts according to the current network activity at any given time and is dependent on block space. Given this, there is no way to tell how much Ethereum will be burnt over time after this mechanism is implemented.
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In addition to this, the burn rate could end up being much higher than the issuance during times of high congestion. This, in turn, could end up leading to a liquidity crisis in the network as too much ETH gets burnt.
Holders of the digital asset remain unfettered by this though. Ahead of the ETH 2.0 complete upgrade, over 6.3 million ETH coins have been staked in the ETH 2.0 deposit contract. Representing over 5% of the current Ethereum supply locked ahead of the upgrade.
Ethereum price continues to trade below $2,000 | Source: ETHUSD on TradingView.com
Forecasts remain that this number will grow even more as the upgrade which is scheduled for 2022 is still a while away and this gives more investors time to get in on staking.
Holders have also staked about 9.34 million ETH in DeFi and are currently earning yield on various DeFi platforms from their staked ETH.
As the upgrade draws nearer, it is only a matter of time before it will be apparent how this will affect the monetary policy of Ethereum.
Featured image from Cryptocoin Spy, chart from TradingView.com