The reason Ethereum is currently considered a deflationary cryptocurrency is that the number of ETH tokens entering circulation is less than the number of tokens burned on a regular basis.
Many crypto projects in the market oscillate between being inflationary and deflationary in nature. Ethereum, the largest altcoin in the market has recently acquired the status of a deflationary cryptocurrency, due to its recent burning rate.
But before we delve deeper into the subject, let’s give a quick understanding of when an asset becomes deflationary.
Why are cryptos so deflated?
The terms inflation and deflation are derived from the supply and demand of assets. It is important to note that the majority of crypto assets can be inflationary in nature. This is directly related to the supply of circulating tokens in the market. The more tokens there are in circulation, the higher the chance that the crypto will be affected by inflation.
Some crypto assets come with a limited supply, such as Bitcoin (21 million) or BNB (200,000,000) while many other projects come with unlimited coins. Some examples of the latter are Solana, Dogecoin, and Ethereum.
However, crypto assets can become deflationary even with limited or unlimited supply. In the case of coins with an infinite supply, there must be a burning mechanism whereby some tokens are ‘burned’ (destroyed) or moved out of circulation in a separate wallet that cannot be accessed. Therefore, burnt tokens are worthless.
However, burning is an important component because it creates a balance between supply and demand, which will help determine the price of the token. If demand exceeds supply, prices will rise and vice versa.
Bitcoin, Shiba Inu, or BNB are good examples of deflationary tokens. Now Ethereum is also said to be a deflationary crypto asset. So what caused this transition?
How is Ethereum transitioning into a deflationary crypto asset?
The reason Ethereum is currently considered a deflationary cryptocurrency is that the number of ETH tokens entering circulation is less than the number of tokens burned on a regular basis.
Ethereum launched the EIP-1559 protocol back in August 2021, where EIP stands for Ethereum Investment Protocol. The protocol requires that for 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 removed from circulation in the process. Currently, the estimated ETH burning rate is 1.62 ETH per minute, according to reports. This has made Ethereum more deflationary than Bitcoin.
Ethereum’s transition into a deflationary asset cannot be credited solely to its burn rate. The previous year, Ethereum switched from a Proof-of-Work (PoW) network to a Proof-of-Stake (PoS) network. This is a big game changer for Ethereum and it is called Ethereum Merge.
PoS is a more efficient mechanism that allows users to sell ETH in exchange for returns. This transition from PoW to PoS has attracted many investors. As per Etherscan, more than $24 billion worth of ETH is stored in the Beacon Deposit Contract, which is the smart contract at the core of the new transition.
It has been witnessed that the NFT (Non-Fungible Token) and DeFi (Decentralized Finance) activities carried out on the Ethereum blockchain have led to the maximum burning of ETH during the previous week (almost 8,000 ETH).
In Conclusion: Is this good news for the ETH community?
Experts point out that the high rate of burning Ethereum has had a positive effect on the economy of the coin. After a disastrous last year, the price of ETH this year has risen dramatically.
Experts believe that if Ethereum can continue its burning rate and keep its circulating supply lower than the number of tokens burned, the price of ETH will continue to rise, which could be good news for long-term investors. At the time of writing, ETH was trading hands at $1,633.22, up 0.40 percent on the previous day.
