The long-awaited Ethereum merger took place in September, changing it from an old Proof-of-Work (POW) model to a sustainable Proof-of-Stake (PoS) consensus algorithm. Many observers expected Ether (ETHtickers) to fall around $1,345) and responded positively as its daily emissions were reduced by 90% with the cessation of mining operations. However, the expected price increase never materialized. Ether is down over 7% since the update.
Post-merge ETH monetary policy
Ethereum’s monetary policy reduced the supply of tokens to 1600 ETH per day. According to the PoW model, an equivalent of 13,000 ETH was issued daily as a mining reward. However, this was completely removed after the merge, as mining operations are no longer valid in the PoS model. This leaves only the 1600 ETH stash for staking rewards, reducing your daily stash by 90%.
This monetary policy has been a critical driver behind expectations for a rise in the price of Ether. However, users failed to consider the impact of marketing sentiment and regulatory changes. The deflationary model should impact ETH. Long-term cost when blockchain supply growth is in negative territory. Token supply growth since the merger was -0.01%, meaning roughly the same amount of ETH was produced as the amount burned through transaction fees. Although this metric indicates deflation, increasing the token’s price is not essential, especially if the liquidation in the cryptocurrency market remains high.
The state of ETH deflation
ETH is currently deflating. The number of outstanding tokens has dropped by more than 10,000 over the past two weeks, while 3,037 new permits have entered the market since the merger. The supply of new tokens increased through October 8 as Ethereum remained in inflation. Since then, transaction fees have burned more tickets, making ETH deflationary.
More than 49,000 ETH have been burned at an average rate of 1.15 tokens per minute over the past 30 days. It seems that the supply of Ether has peaked, and supply growth will continue to decline significantly. On a new blockchain project called XEN Crypto. Since its launch, XEN Crypto has burned over 5,391 ETH in transaction fees, ranking second in the ETH Burned leaderboard, just behind Uniswap V3.
The transaction and minting rate of ERC-20 tokens was significant between October 8th and 15th. This week’s average gasoline price was 37 Gwei, more than double the 15 Gwei’ ultrasonic barrier’ that triggered this deflation. As long as the Ethereum gas price stays above 15 Gwei, the network will burn enough tokens to keep it deflationary.
Why isn’t Ether’s price rising?
While the mechanism introduced by the merger and the current state of deflation are technically meant to push prices higher, the timing isn’t right. A cryptocurrency’s fees are not only based on its supply and combustion mechanism: settlement also plays an important role. The US Federal Reserve has raised interest rates aggressively in recent months. As a result, government bonds have produced significant returns, which are much less risky than cryptocurrencies.
There is also more regulatory pressure in the crypto space, and as the recession spirals out of control, short-term investors are turning away from volatile assets.
Deflation: an impact in the long run
Overall, deflation will undoubtedly have a long-term impact. When a bull cycle hits, it will increase the network’s usage, boosting gas prices. This will result in a more severe drop in token supply and a possible price surge. The sell-off has slowed over the past few days as ETH prices appear to have reached a sustained level of resistance. However, whether a bull cycle occurs soon will depend on market sentiment.