Ethereum, one of the leading blockchain networks, witnessed the burn of 3,292.33 ETH valued at approximately $5.26 million based on the prevailing Ethereum price of $1,599.62. This event isn't merely a random occurrence; it is a part of Ethereum's recent significant upgrade known as EIP-1159.
- Introduced on August 5th, 2021, the EIP-1159 upgrade fundamentally transformed Ethereum's transaction fee structure. Unlike the traditional first-price auction system where users continuously outbid each other for faster transaction confirmations, EIP-1159 introduced a more predictable and fair fee model.
- Every transaction now includes a "base fee", which is dynamically adjusted based on the prevailing demand for block space in the Ethereum network. The critical change, however, is that this base fee doesn't go to the miners; instead, it is "burned". Burning, in crypto terminology, means sending the tokens to an address from which they can never be retrieved, effectively removing them from circulation.
- The burning mechanism decreases the total supply of Ether, introducing scarcity, which can lead to increased demand and potentially higher prices in the long run.
- Ethereum's current Ether issuance rate stands at about 4% annually. However, with the upcoming Ethereum 2.0 upgrade, this rate is projected to drop significantly to approximately 0.5-1%. Ethereum 2.0 will transition the network from a Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS), a more energy-efficient mechanism.
- As the EIP-1159 base fee continues to burn Ether and with the potential decrease in issuance after Ethereum 2.0, there's a possibility that the burn rate could surpass Ether's issuance rate. If that scenario unfolds, Ethereum could, in effect, become a deflationary currency. As indicated, the net annualized issuance rate for Ether was already at -1.75% recently.
The recent burning of Ether following the EIP-1159 upgrade marks a transformative phase for Ethereum's economic model. It addresses issues like fee predictability and potentially paves the way for a deflationary nature of the cryptocurrency in the future. As Ethereum 2.0 comes closer to fruition, the dynamics of Ether's supply and demand will be intriguing to monitor for both investors and enthusiasts alike.
