Ethereum Turns Deflationary

Ethereum is one of the oldest and one of the largest coins on the market. Currently, it is a Proof of Work network that uses electricity and hardware to run, with the main incentive coming from mining rewards.

These mining rewards accumulate from gas fees from those doing transactions; and also from Ethereum’s inflationary design, which creates new Ether at a constant rate for the sole purpose of rewarding miners.

Many Bitcoin maximalists have claimed that Ethereum’s inflationary design was a drawback as there was no end to the amount of Ethereum that would be created.

On 5 August 2021, a new patch was forked to the Ethereum network titled EIP-1559. This new patch addressed the wild volatility in transaction fees by averaging the fees out over a period of time. One function of EIP-1559 was that it would burn Ethereum with each transaction.

At first, the token burning was very minimal but as the demand for Ethereum continued to increase, so did the number of tokens that were being burned each day.

On 28 October, the number of coins burned exceeded the number of coins created. This means for the first time ever, Ethereum’s circulating supply decreased. This event is being celebrated as a statistic that goes to show just how much the Ethereum blockchain is being utilized. Gas prices are still incredibly high and the cost to use the network has put a lot of smaller retail investors off from using tokens on the network.

Ethereum 2.0 is set to take over early next year. When this happens the Ethereum blockchain will no longer be a Proof of Work network, but instead, become Proof of Stake. When this happens the inflationary design for Ethereum will also end.

This is happening as Proof of Stake requires almost no hardware to run and Ethereum nodes can run on something as small as a Raspberry Pi. The mining rewards will drop but the cost of running a node will do too.

Ethereum 2.0 could be the beginning of mass adoption for the blockchain. While there are thousands of developers building on the chain, it is well known that the cost of transactions has stopped a lot of institutions from adopting the technology.

Ethereum 2.0 will offer transactions of over 1000 times its current speed, which in effect will significantly drop such costs. Time will tell If the high demand continues until the Ethereum 2.0 launch and whether the circulating supply of Ethereum will continue to decrease.

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Updated: 10/29/2021 — 19:00