The deflationary saga of Ether is over, at least for a bit. Todayq News reported in October that more Ethereum was expected to burn than was put into circulation because the issuance rate had significantly declined— a 90% drop in new issuance. However, the situation seems to be entirely flipped now.
According to data from ultrasound money, Ethereum’s (ETH) net issuance, or the annualized inflation rate, has increased to 0.07% after briefly falling below zero due to market volatility brought on by the failure of cryptocurrency exchange FTX. Millions of dollars’ worth of cryptocurrency had moved on-chain as a result of an increase in Ethereum network traffic.
The volume of Ethereum that is currently being mined, however, exceeds the volume that is currently being burned, according to the current positive inflation rate. Over the last seven days, supply has grown 0.14% annually, according to ultrasound.money.
A lack of network activity that resulted in decreased demand, according to Nick Hotz, vice president of research at the digital asset management company Arca, was the cause of ETH’s deflationary switch.
As per Hotz, there was a tonne of demand for swaps post-FTX on both centralized and decentralized exchanges due to volatility. He asserted that after the FTX debacle, there has been a dramatic decrease in demand for centralized or even decentralized exchanges.
Ethereum’s Merge, which on September 15 changed the platform’s protocol from a proof-of-work methodology to a more energy-efficient proof-of-stake protocol, was widely anticipated to cause ether’s price to fall by deflation.
However, a different mechanism known as the Ethereum Improvement Proposal (EIP)-1559, in which fees paid for network transactions are “burned,” or removed from circulation, also influences the inflation rate of Ethereum. The EIP-1559 is primarily related to how much ether is burned while using the network. Higher the number of transactions recorded on the blockchain, higher the burn rate of Ethereum.
After FTX’s downfall caused market concerns, the quantity of ETH burned increased by as much as 5,000 ETH in a day, according to statistics from Etherscan. The burn rate is now only about 1,200 ETH per day.
According to Hotz, the technique does not result in net inflation or deflation but rather produces a reliable and consistent supply of ETH and increases Ethereum adoption through layer 2 activity. The vice president claimed that EIP-1559 works like the Fed when the economy is ‘hot,’ it reduces the supply of money (in this case the supply of ethereum is reduced).