Inflation of the cryptocurrency Etherium ETH has reached the maximum in two years. What was the reason for such a thing?
Efirium’s inflation rate rose to 0.74 per cent annually – raising concerns about the altcoin’s long-term narrative as “ultra-hard money”. The statistics on the issuance of new ETH tokens were noted in a report by analysts at major crypto exchange Binance. They said that the rate of issuance reached the highest level in two years, as reduced activity in the blockchain and a decrease in the rate of token burning changes the economic status of the asset.
As a reminder, fans of Etherium characterise the ETH cryptocurrency as “ultrasound money”, i.e. “ultra-hard money”. Simply, hard money is a currency whose purchasing power and exchange rate not only remain stable, but also generally do not tend to decline. Bitcoin, among others, is usually referred to as such a phenomenon.
Representatives of the Ethical community have created a meme about ultra-hard money in the face of this cryptocurrency. The logic here is that the Etherium network implements a mechanism for burning cryptocurrency that was paid by users as commissions for transactions.
Accordingly, with a consistently high demand, the supply of ETH decreases over time, which just turns the crypto into ultra-hard money.
Vitalik Buterin, the creator of Efirium
Recently, however, activity on the blockchain has declined as users move to second-tier networks like Base and Optimism. Accordingly, commissions in Efirium are becoming lower, which directly affects the volume of cryptocurrency burns.
And since the rate of issuance of new ETH outpaces the scale of burn, Efirium turns out to be an inflationary project rather than a deflationary one. And that beats the relevance of said narrative.
What’s going on with Efirium?
According to Cointelegraph’s sources, the trends uncovered highlight a growing problem for Efirium and call into question the once current assumption that ETH will be able to maintain its deflationary nature.
Regular burning of Efirium is a process that was introduced with the EIP-1559 update in August 2021. This mechanism changed the commission structure of the altcoin network. After the update, every transaction on the network includes a base commission that is automatically set based on the network's level of congestion.
If the network is congested, the base commission increases, and when activity is low, it decreases. This base fee is not received by validators, but is burned, i.e. permanently removed from circulation, reducing the total supply of ETH in circulation.
Ether issuance and burn rates
In addition to the base fee, transaction senders can add tips to speed up the processing of their transactions. These are not burned, but go directly to validators as a reward. In this way, the base commission, which depends on network congestion, is wiped out and the tips remain a reward for those who make the blockchain work.
The burning process happens automatically with each transaction, and the amount of ethers burned depends on activity on the network. The more transactions and the higher the load on the network, the more ETH is burned.
That is, this mechanism affects the economics of the ecosystem by creating a deflationary effect when the total supply of ETH decreases. Theoretically, this could increase its value, especially if the amount of ETH burned exceeds the issuance of new tokens that go to validators.
The change in the exchange rate of Etherium ETH in 2024
As a result, burning ETH helps regulate the amount of it in circulation, creating potential conditions for value growth if demand remains high.
The growing popularity of Layer 2 (L2) solutions like Arbitrum and Optimism has had a significant impact on activity on the first tier of the Etherium blockchain. Still, these networks process transactions outside of the core network, lowering gas fees and thus reducing the amount of ETH burned through transaction fees.
Binance analysts explained that the Dencun update has led to “increased adoption of second-tier solutions with lower fees” and a slowdown in ETH burn rate.
As a reminder, Dencun was activated in Efirium in mid-March 2024, and its key objective was to reduce commissions in second-tier Eth-based chains.
Experts continue.
It is important to note that Etherium inflation still remains below 1 per cent, and this should not be seen as a negative outcome. Inflationary pressures typically increase during periods of low network activity, but can return to a deflationary state when activity increases.
Commissions in Efirium networks and second-tier solutions
The Binance report also questions the “ultrahard money” narrative that positions ETH as a deflationary currency. Here’s the rejoinder.
As second-tier solutions squeezed out network activity throughout the year, the situation was compounded by general market conditions, which led to a decline in transaction fees and therefore the volume of ETH tokens being burned. September was one of the months with the lowest burn rate since the transition to Proof-of-Stake in 2022.
Now that ETH issuance is surpassing the volume of tokens burned, the net increase in total supply is moving Efirium further away from its deflationary target.
By the way, the day before, Vitalik Buterin, the creator of Ether, proposed a curious idea – lowering the threshold of the required number of coins to participate in staking. In his opinion, such a step could make the network more decentralised.
The situation with Efirium is an obvious consequence of the decreasing activity of blockchain users. They are increasingly using second-tier network-based solutions like Base and Arbitrum. Also, we should not forget about the available first-tier alternatives along the lines of Solana. So in general, we can assume that the deflationary component of ETH will remind of itself less and less in the future.
Related posts
