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Ethereum’s (ETH) merge event failed to realize the much-hyped “flippening” narrative, where the world’s second-largest cryptocurrency by market capitalization was widely predicted to supersede Bitcoin following its transition to a Proof-of-Stake (PoS) transaction authentication mechanism. However, now that Ethereum has given up all of its pre-merge hype gains, its current deflationary characteristics, ephemeral as they may be, has provided much-needed validation to the bulls in the current difficult macroeconomic climate.
As a refresher, the merge event marked Ethereum’s transition to a PoS regime where validators lock up a specific amount of Ethereum in dedicated nodes in order to compete with each other to authenticate transactions and introduce new blocks into the chain.
After Ethereum’s London Fork, a base fee is determined for a given level of network activity. This base fee is then burnt. Consequently, the validators’ reward in the post-merge phase predominantly consists of two variables: the tip fee, which is the cost incurred by a user to prioritize the processing of a particular transaction, and the block subsidy, which is fixed at 2 ETH per block and will be divided equally among all of the validators. Given the increased efficiency of the network in the post-merge phase, transaction processing rewards – hence, the cryptocurrency’s supply inflation – have fallen precipitously.
XEN will be going live on #ethpow chain today. Note, this is a new and an experimental chain that forked off Ethereum and remained the "proof of work", DYOR to better understand the risk vs reward for your type of engagement...
— XEN Crypto Official (@XEN_Crypto) October 13, 2022
In order to turn truly deflationary, Ethereum needs elevated network activity, which then ramps up the base fee burn. This requisite network congestion element was just provided by XEN Crypto.
“XEN is an ERC-20 token built on the Ethereum blockchain. It’s based on the first principles of crypto like decentralization, self-custody, transparency, and trust through consensus. The XEN smart contract is immutable, it has no admin keys, and it’s open source.”
Interestingly, XEN has no supply caps, allowing every user to mint as many XEN tokens as they want for free. The only two requirements to mint XEN tokens are a metamask wallet and some Ethereum to pay the requisite gas fees. It is this activity that is now increasing network congestion on Ethereum, thereby allowing an increased burn rate on the back of an elevated base fee.
As is evident from the snippet above, 16,816 Ethereum coins have been burnt over the past 7 days, with XEN Crypto contributing around 26 percent to this activity.
Consequently, Ethereum’s total supply has decreased by 0.22 percent over the past 7 days as the burn rate exceeded ETH’s supply addition from validators’ rewards.
So, is this deflationary regime sustainable? Vitalik Buterin had claimed back in July that the annual issuance of ETH would be equal to 166 times the square root of the number of staked coins after the merge. As of this moment, 14.193 million Ethereum coins have been staked on the Beacon Chain. By applying Buterin’s calculations, the annual issuance of Ethereum based on the current staked level equates to 625,399.267 ETH or 1,713.42 ETH per day. Now, over the past 7 days, 16,816 ETH were burnt, equating to a daily burn rate of 2,402.29 ETH. This means that at the current network activity level, Ethereum supply will decrease by a whopping 688.87 ETH per day. But, and this is a major qualifier, the current hype around XEN Crypto will eventually diminish, and barring any new development, the network activity on Ethereum is likely to fall.
Consequently, Ethereum has not yet turned deflationary on a sustainable basis. However, should its global penetration and use cases increase, Ethereum can very well turn into a permanent deflationary asset in the not-too-distant future.