Ethereum (ETH), the second largest cryptocurrency by market capitalization, implemented a token burn mechanism on August 5, 2021 through the Ethereum Improvement Proposal (EIP) 1559 upgrade. Since then, around $9 billion worth of tokens have been cumulatively burned, according to Glassnode data.
In total, around 2.8 million ETH tokens have been removed from the supply since the burn mechanism was introduced, according to data from. ultrasound.money.
In the Glassnode chart above, blue reflects the daily supply of ETH burned at the spot price, and red represents the cumulative value of ETH burned over time. crypto slate Since the collapse of Terra-Luna in May 2022, Ethereum’s daily burn rate has dropped significantly, suggesting it’s nearly stagnant.
The 2021 bull market destroyed between $20M and $75M worth of ETH daily. That’s just about $2-4 million worth of ETH burned every day in December 2022.
Note that the drop in Ethereum’s daily burn rate is a direct reflection of Ethereum’s lower activity during the current bear market.
Understanding the Importance of ETH Burn
Token burial refers to sending a token to an address from which it cannot be retrieved. Token burns, also known as token discards, reduce the circulating supply of assets, shrinking the overall supply over time. The burn-in mechanism was intended to regulate Ethereum gas fees (the fees paid to perform transactions on Ethereum).
Before the burn mechanism was introduced, Ethereum users had to guess what fees they would have to pay to get their transactions on the blockchain. This has led to greater volatility in gas prices on Ethereum, especially during periods of high network congestion.
As millions of users complained about high gas prices, the Ethereum network incorporated a token burn mechanism. According to the EIP 1559 upgrade, users have to pay the base rate and tips. This is equivalent to the user paying the base rate for the delivery and tipping the delivery person for on-time or on-time delivery. The network consumes all base fees, but chips reward miners.
A closer look at the daily ETH consumption and gas price data from Glassnode shows that the average gas price has dropped significantly from around 100 Gway before the implementation of EIP 1559 to around 15-20 Gway. For example, the average gas price range increased from 100 to 200 Gwe between January and April 2021, but spiked above 200 Gwe during periods of network congestion.
In other words, the average gas price on Ethereum has decreased by about 80% since the implementation of the combustion mechanism.
According to Etherscan, the average Ethereum gas price on December 30th was 20.55 Gwei. dataAdditionally, data from ultrasonic.money shows that the average Ethereum gas price over the last 30 days was 16.2 gwei.
In addition to regulating gas prices, an ETH burning mechanism was introduced to put deflationary pressure on the token. In other words, the burn mechanism can reduce the supply of ETH and cause the price of ETH to rise over time. to be affected.
At the time of writing, ethereum’s inflation rate or its net issuance rate was 0.013% per year according to data from ulsonous.money. If Ethereum had not switched to a Proof of Stake (POS) consensus mechanism, its issuance rate would have reached 3.588% annually. With the switch to POS, Ethereum inflation is well below that of Bitcoin (BTC), which issues new coins at an annual rate of 1.716%.
According to ultrason.money estimates, approximately 1.9 million ETH tokens are expected to be burned annually, but only 622,000 ETH tokens are expected to be issued annually.
Ethereum’s price is currently struggling in the middle of crypto winter — ETH is trading at $1,196.52 at the time of writing, down 67.88% over the year. However, due to the token burn mechanism, ETH is expected to deflate, potentially increasing its value in the long run.