Ethereum went deflationary after the September merger. But for now, it won’t matter much.
The long-awaited Ethereum Convergence occurred in September, moving from the old Proof of Work (POW) model to a robust Proof-of-Stake (PoS) consensus algorithm. many observers
The price will react positively as its daily emissions will drop by 90% with the cessation of mining.
However, the expected increase in prices did not materialize. In fact, Ether has dropped over 7% since the update. So why didn’t Merge raise the price of the coin?
Monetary policy of ETH after the merger
The monetary policy of Ethereum was to reduce the supply of tokens to 1600 ETH per day. A PoW model equivalent to 13,000 ETH per day has been released as a mining reward. However, this was completely removed after the merger as mining operations are no longer valid in the PoS model. This left only 1600 ETH for staking rewards, reducing his daily supply by 90%. If the average price of gas on the Ethereum network is at least 16 gwei, 1600 ETH will be burned every day, which resets Ethereum inflation and even causes deflation.
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This monetary policy has been a key driver of Ether price growth expectations. However, users have not considered the impact of marketing understanding and regulatory changes. The deflationary model was created to influence the price of ETH in the long term, while the supply growth of the blockchain was in negative territory.
The increase in token supply after the merger was -0.01%, meaning that roughly the same amount of ETH was generated as was burned through transaction fees. While this indicator is indicative of deflation, it is not significant for the price of the token to rise, especially when liquidation remains high in the crypto market.
ETH Deflation Status
ETH is currently fading away. Although the number of tokens in circulation has decreased by more than 10,000 over the past two weeks, a total of 3,037 new tokens have entered the market since the merger. The supply of new tokens increased until October 8 as Ethereum remained in a state of inflation. Since then, more tokens have been burned due to transaction fees, causing ETH to deflate.
Over 49,000 ETH have been burned in the last 30 days at an average rate of 1.15 coins per minute. It looks like Ether supply has peaked and supply growth will continue to decline significantly. So what first caused this deflation on October 8th?
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This was mainly due to a new blockchain project called XEN Crypto. XEN Crypto has burned over 5,391 ETH in transaction fees since launch, placing second behind Uniswap V3 on the ETH Burned leaderboard. Transaction rates and the issuance of ERC-20 tokens were significant from October 8th to 15th. The average gas price this week was 37 Gwei, more than double the 15 Gwei “ultrasonic barrier” that caused the deflation.
For now, as long as the Ethereum gas price stays above 15 gwei, the network will burn enough tokens to keep the deflation going.
Why is the price of ether not going up?
While the mechanism introduced by the merger and the current deflationary environment are technically expected to push prices higher, the timing is definitely not right. Prices of any cryptocurrency depend not only on the supply and burn mechanism, liquidation also plays an important role.
The US Federal Reserve has been aggressively raising interest rates over the past few months. As a result, government treasury bonds provide significant returns and carry far less risk than cryptocurrencies. There is also more regulatory pressure on the crypto space, with short-term investors moving away from floating assets amid a raging recession.
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Coinglass data shows that ETH liquidation has been particularly high over the past two months. This is the main reason why the price of ETH did not rise, but fell, despite being in a deflationary state.
Deflation: long-term effect
Overall, deflation will definitely have an effect in the long run. If a bull cycle does occur, it will lead to increased network usage and therefore higher gas prices. This will lead to a more significant drop in the supply of tokens and a possible increase in the price may appear. The liquidation has slowed down in the past few days as ETH prices hit a sustained resistance level. However, whether a bull cycle emerges soon will depend on market sentiment.