Recently, the annual high rate of deflation of the Ether supply was attained. The devaluation rate has surged beyond 17% again, a rare phenomenon since May last year. As the deflation rate rises, ETH tokens become increasingly rare.
In the long run, this is expected to increase demand for and thus the value of the cryptocurrency. Friday’s ether-to-dollar exchange rate dropped 5% due to Silvergate concerns.
Tether committed deception to keep its currency accepted by financial institutions worldwide. This suggests market players are ignoring the latest ETH deflation rate revisions.
Coincidentally, the Ethereum/U.S. Dollar exchange rate is currently about $1,570, down roughly 10% from its recent highs in the mid $1,700s. Although ETH has fallen since the beginning of February, its rate of deflation has not.
Reasons for Ethereum’s Sudden Fall
For investors, deflation is a storyline that could help ETH later in 2018. Improvements to the Ethereum network, such as the upcoming rollout of staked ETH withdrawals, are on the horizon.
Recovery for DeFi, and maybe even an uptick in the macro environment. The cost of using a network has two parts.
The first is a transaction fee that is applicable to all users and must be paid for by them. Their transaction has the potential to be validated and carried out on the blockchain.
Customers then have the opportunity to leave a gratuity to speed up the processing of their payment. The base charge is calculated automatically by the Ethereum network and increases during peak usage periods.
After that, each and every one of these customer base fees has to be discarded. It eliminates the tokens from circulation for good, never to return. Under Ethereum Improvement Proposal (EIP) 1559.
During the London hard fork that took place in August of 2021, it was incorporated into the Ethereum code. Thus, the pace at which Ether is consumed grows in tandem with the cost of the basic gas.
The amount of Ether (ETH) that can be issued each year is regulated at around 0.55%. When the thermal efficiency reaches that threshold and beyond, the supply of ETH will begin to diminish.
The nodes and stakers who protect the Ethereum network are rewarded with ETH. The next graph depicts the steady increase in Ethereum network (base) gas fees over the past few months.
Potentially Rapid Increase in the Rate of ETH Deflation
In early 2022, the daily annualized ETH (EIP 1559) burn rate reached a high of 6.0% due to persistently high network congestion. Since both the cost of energy and the cost of operating a mining rig has risen dramatically.
The miners are the ones who generated the network’s energy. In contrast, Ethereum’s issuance ratio was between 4.4% and 4.6% every year.
For the time being, the blockchain relied on the much less efficient proof-of-work consensus method. Hence, the deflation rate of Ether was never more than about 1.5%.
The possibility that the entire crypto industry adopts EIP 1559 and its new, drastically lowered burn rate is a key unknown. The DeFi market can get back to where it was around the beginning of 2022.
As a result of the ETH Issuance Rate, the deflation rate of Ether may reach a whopping 5.5%. Even though the idea of ETH deflation may be appealing, it is unlikely to happen anytime soon.
The Price of Ethereum: What’s Next?
The near future of the second-largest cryptocurrency in the world may require investors to exercise some patience. The value of the market seems to be unstable.
The recent decline in ETH has broken below an uptrend that has been in place since the beginning of 2023. That might spell trouble for Ether’s price in the immediate future, opening the door to a retest of February’s lows in the mid-$1,400s.
If next weekend’s US stock market surge continues on Friday’s strong tone, cryptocurrency markets may avoid further falls. ETH is likely to stay around the mid-$1,400s to mid-$1,700s area since February.