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The reason why Ethereum is now considered a deflationary cryptocurrency is that the number of ETH tokens that come into circulation is less than the number of tokens that are regularly burned.

Several crypto projects in the market oscillate between being inflationary and deflationary in nature. Ethereum, the largest altcoin in the market, has recently gained deflationary cryptocurrency status, thanks to its recent burn rate.

But before we dive deeper, let us quickly explain when an asset becomes deflationary.

Why are cryptos becoming deflationary?

The terms inflationary and deflationary derive from the supply and demand of an asset. It is important to note that the majority of crypto assets can be inflationary in nature. This directly relates to the supply of tokens circulating in the market. The more tokens in circulation, the higher the chances that the crypto will be affected by inflation.

Several crypto assets come with a limited supply, such as Bitcoin (21 million) or BNB (200,000,000) while many other projects come with an infinite supply of coins. Some examples of these are Solana, Dogecoin and Ethereum.

However, a crypto asset can be deflationary despite having limited or unlimited supply. In the case of infinite supply coins, there must be a burning mechanism in which a certain number of tokens are “burned” (destroyed) or they are withdrawn from circulation in a separate, inaccessible wallet. Therefore, the tokens that are burned are rendered useless.

However, burning is an essential element because it creates a balance between supply and demand, which in turn helps determine the prices of these tokens. If demand exceeds supply, prices will likely rise and vice versa.

Bitcoin, Shiba Inu or BNB are good examples of deflationary tokens. Now, Ethereum is also hailed as a deflationary crypto asset. So what caused this transition?

How did Ethereum become a deflationary crypto asset?

The reason why Ethereum is now considered a deflationary cryptocurrency is that the number of ETH tokens that come into circulation is less than the number of tokens that are regularly burned.

Ethereum launched the EIP-1559 protocol in August 2021, where EIP stands for Ethereum Investment Protocol. The protocol implies that with every transaction made on the Ethereum blockchain, a fraction of the transaction fee or gas fee will be burned.

Since the launch of EIP-1559, nearly 2.8 million ETH worth $4.6 billion (at current prices) have been burned so far and taken out of circulation in the process . Currently, an estimated ETH burn rate is 1.62 ETH per minute, according to reports. This made Ethereum more deflationary than even Bitcoin.

Ethereum’s transition to becoming a deflationary asset cannot be attributed solely to its burn rate. The previous year, Ethereum moved from a Proof-of-Work (PoW) network to a Proof-of-Stake (PoS) network. This was a game changer for Ethereum and was commonly referred to as Ethereum Merge.

PoS is a more efficient mechanism that allows users to stake their ETH in exchange for returns. This transition from PoW to PoS has attracted many investors. According to Etherscan, more than $24 billion worth of ETH is deposited on the Beacon deposit contract, which is a smart contract at the heart of the new transition.

It was found that NFT (Non-Fungible Tokens) and DeFi (Decentralized Finance) activities conducted on the Ethereum blockchain led to the maximum burning of ETH in the previous week alone (nearly 8,000 ETH).

In conclusion: is this good news for the ETH community?

Experts indicate that the massive burn rate of Ethereum has had a positive effect on the economy of the coin. After a disastrous previous year, ETH prices have risen significantly this year.

Experts believe that if Ethereum can sustain its burn rate and maintain circulation supply below the number of tokens burned, ETH prices will likely continue to rise, which can be great news for long-term investors. At the time of writing, ETH was trading at $1,633.22, gaining 0.40% from the previous day.

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