Robert Steinadler, a year ago
The Merge moved Ethereum from proof of work to proof of stake, and the main implication is that the Ethereum blockchain is becoming carbon-neutral. Today was the big day and so far, there have been no hiccups or fatal errors reported. This does not mean that we are out of the woods yet, but it looks pretty good, and chances are high that Ethereum can proceed with the rest of the items on its roadmap. Another factor that comes into play is the supply of Ether, the native currency of the Ethereum blockchain.
Is ETH becoming scarce and how is the supply changing within hours after the Merge commenced?
As many of you might already know, there is no hard cap on the Ethereum supply. Hypothetically, it is possible to have an infinite amount of ETH. This is a major difference between Bitcoin and Ethereum, and its monetary policy is driven by a yearly inflation rate instead.
This inflation rate has been reduced by introducing EIP-1559 before the Merge commenced. Instead of passing on all the fees to miners or the stakers to be precise, a small amount of ETH gets burned per transaction.
With the transition to proof of stake, inflation has been lowered once again, which creates a special situation. If enough people use Ethereum and create a demand for ETH to power their transactions, the emission rate of fresh ETH can fall below the demand. In effect, Ethereum could become a deflationary asset.
According to the website Ultrasound Money, the burn rate is already higher than the production of ETH. Meaning that the supply of Ether has already shrunk by about 100 ETH after the Merge. It is important to keep in mind that this could change drastically.
A supply shock is possible, but not inevitable. If fewer people use Ethereum or the same amount of market participants make fewer transactions, the burn rate will fall between the emission rate of ETH.
While the Ethereum community is cheering the successful Merge and a first supply shock, it remains to be seen if this can indeed turn Ether into a deflationary asset. There is a technology that could pose a risk to this outcome and interestingly enough, this technology is desperately needed by Ethereum to thrive.
One thing that didn’t happen with the Merge is that transactions are not cheaper nor are they faster. Ethereum is still waiting for a technology that is called sharding which is meant to solve both problems. In the meantime, second-layer technologies are most important to make transactions instant and cheap.
Most of these technologies achieve that by so-called roll-ups that are finalizing on Ethereum as a consensus layer. They bundle hundreds of transactions into one block, saving a huge amount of time and fees. Fees that would otherwise be burned.
Should the adoption of second-layer protocols continue and on-chain transactions become less important to the broader masses, then this could decrease the burn rate drastically.
It is estimated that we have to wait at least 6 months to get a clearer picture of how this is going to play out in the current market situation. In any case, broader adoption of Ethereum would contribute to a bullish scenario and a reduced user base would be followed by a bearish scenario.
May 16, 2023
Ethereum developers have come up with a simply solution against the arms races that unfold because of mempool related trading. They will simply burn the ETH that these participants collect! The effect is that Ethereum will become even more scarce/deflationary and - hopefully - valuable.
Apr 21, 2023
A saying that you hear often in any financial market is: history doesn't repeat but it often rhymes. The patterns of subsequent market cycles are never quite the same but similar. How does the current price action compare to previous bear markets? And what lies behind the price numbers?
Apr 17, 2023
Our online identity is currently managed by centralized institutions. It's either a government (log in with your social security number) but more often an e-mail provider or social media provider. Ethereum provides an alternative. Crypto wallet provider MetaMask has recently integrated this 'Sign in with Ethereum' functionality.
Apr 14, 2023
The prediction of bearish investors out there hasn't come to fruition. After yesterday's Shapella fork of Ethereum, the price didn't drop. On the contrary: the price pumped. Instead of unstaking and dumping their ETH on the market, there was quite a nice inflow of staked Ether.