The Ether supply’s deflation rate has lately hit its highest point of the year. On Wednesday, the Annualized EIP-1559 Burn Rate surpassed the ETH Issuance Rate by 1.425%, the biggest since a one-day fluke in May last year when the deflation rate reached 17%.
When the deflation rate rises, ETH tokens become harder to get. Most analysts believe this will result in a long-term price increase for the cryptocurrency.
ETH/USD’s near-5% decline on Friday reveals that traders aren’t paying much notice to recent changes in the ETH deflation rate. Crypto markets took a hit due to fears over crypto bank Silvergate which claimed that Tether committed fraud to preserve access to global banking networks.
Now trading around $1,570, ETH/USD is almost 10% down from its previous highs in the mid-$1,700s. While ETH’s price has declined since the beginning of February, its deflation rate has not. Indeed, it appears to be ascending.
Traders should consider deflation as a talking point or narrative that could benefit ETH later this year. Other themes that could boost include Ethereum network upgrades, the launch of staked ETH withdrawals next month, a potential DeFi revival, and a potential improvement in the macro environment if a US recession is avoided and falling inflation allows the US Federal Reserve to cut interest rates.
Before answering the question of what is causing the increase in the ETH deflation rate, it is necessary to comprehend why ETH deflation occurs, which needs an understanding of the Ethereum network cost structure. The network fees are comprised of two components. The first is a base cost all users must pay to ensure their blockchain transaction is accepted and processed.
Then, there is an optional tip that users can pay to speed up the processing of their transactions. The Ethereum network automatically calculates the base transaction cost, which increases during periods of high network traffic. The Ethereum Improvement Proposal (EIP) 1559, introduced into the Ethereum code during the London hard fork in August 2021, specifies that all of these client base fees must be destroyed, removing them permanently from circulation.
So, when the base gas fee increases, so do the rate at which Ether is burned. When this burn rate surpasses the ETH Issuance Rate, approximately 0.55 percent, the ETH supply will decrease.
Also Read: Silvergate Exchange Network Suspended Following Corporate Issues
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