Last Updated: 5 July 2022
In August 2021, Ethereum underwent the London hard fork. With this hard fork, a set of five Ethereum Improvement Proposals (EIPs) was baked into the platform. The Ethereum community was particularly enthusiastic about EIP-1559, which burns a significant portion of the transaction cost of every transaction. In total, more than 8 billion euros worth of ether has been burned since EIP-1559 was launched.
Less and less ether in the oven
However, at the time of writing, we are in the midst of the fiercest bear market in the history of the industry. Activity in the NFT market is in a huge slump, and the DeFi world has also seen its best days. With the hype surrounding these two promising developments disappearing, activity on Ethereum has also dropped significantly. So much that the 7-day average of the daily number of transactions on Ethereum has fallen below a million for the first time since 2020.
The burning of ether via EIP-1559 depends on the daily number of transactions, and as a result, the digital incinerators are currently relatively empty. The lower the number of transactions, the more space there is in the blocks, and that reduces transaction costs. The drop in activity in the Ethereum network is clearly reflected in the statistics of EIP-1559.
At the time of writing, just over 1,000 ethers are still going into the oven on a daily basis. This currently marks the lowest numbers since the introduction of EIP-1559. As you can see, Ethereum has had periods where more than 10,000 ethers disappeared from circulation daily on average. The massive spike in early May marks the sale of digital land in Yuga Labs’ Otherside metaverse.
EIP-1559 and deflation
In the run-up to EIP-1559, the Ethereum community speculated on the potential impact of the update on the protocol’s monetary policy. After all, the combustion mechanism of EIP-1559 means that Ethereum could become deflationary at times. If activity on the network explodes and transaction costs increase, then it is possible that the burn may exceed the block grant to miners.
At the moment, this is not the case. The net emission of ether is now on average, above 10,000 ether per day. At current exchange rates, that represents a value of about 10 million euros per day. However, there have been times when Ethereum has been deflationary, thanks to EIP-1559.
For example, in November 2021, at the top of the previous bull market, Ethereum’s net issuance was negative for a few days. We saw the same in January this year and, of course, during the selling round of Yuga Labs‘ Otherside metaverse. The protocol simply needs more activity to make ether a deflationary asset. Logically, there is none in this market. But if we look at the big picture, Ethereum is not suffering too much in this area.
Although in the monthly chart, the number of transactions per month is also in a downward trend, we are still well above the averages of the 2017 to 2018 bull run. In this respect, the coming months will be important for Ethereum. Firstly, because of the long-awaited transition to Proof-of-Stake. In addition, it is vital for the ecosystem that the usage figures do not fall too far.