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The day Ethereum (really) became deflationary

August 13, 2021
in Ethereum, News
The day Ethereum (really) became deflationary

It’s been almost a week since EIP 1559 was deployed on Ethereum (ETH) via the London hard fork. In 6 days, more than 26,000 ETH have been destroyed by the network via the destruction mechanism put in place by this long-awaited update.

The EIP 1559: immediate results

Over the last few months, EIP 1559 has been at the heart of the debates within the Ethereum community. As a reminder, this EIP (Ethereum improvement proposal) aimed to modify the fee mechanism on Ethereum.

Thus, the auction system where miners used to get the whole fee was replaced by a fee broken down into 3 parts:

  • The base fee, which represents the basic fee that each user must pay to perform a transaction;
  • The inclusion fee, which represents the “tip” that will be recovered by the miner;
  • The cap fee, which represents the maximum amount that the user is willing to spend on the transaction.

In addition to this modification, the EIP 1559 introduces a deflationary mechanism via the destruction of the base fee.

Since the London hard fork, which was deployed on August 5th, more than 26,000 ETH, or more than $81 million, have been destroyed by the network, at an average rate of just over 3 ETH per minute.

Unsurprisingly, the decentralized applications that accounted for most of the destruction were the most used, namely the NFT platform Opensea and the decentralized exchange Uniswap.

Ethereum in the club of deflationary networks

The Ethereum network has witnessed an increase in transaction fees over the past few days. Coupled with more than 1 million daily transactions, this has resulted in the creation of several blocks thanks to which Ethereum has become a deflationary network, a historic event.

In total, nearly 800 blocks have been deflated since the deployment of EIP 1559, according to data from the Carbono site. This means that the number of ETH destroyed in those particular blocks was greater than the number of ETH created in that same block.

The Twitter bot @EthBurnBot has noted several of these deflationary blocks. For example, on August 11 at 1:00 a.m., it detected a series of blocks with a 3.12% annual deflation, with 945 ETH destroyed for every 528 created within 1 hour.

Ethereum deflation anticipated

Although it was widely believed that the ETH destruction caused by the rollout of EIP 1559 would impact inflation, the deflationary nature was not expected until later. Currently, 2-20 ETH are created with each block produced, which represents an annual inflation of about 4.5%.

However, Ethereum is expected to switch from proof of work (PoW) to proof of stake (PoS) in the first quarter of 2022 and its annual inflation is expected to drop to 0.5%. Indeed, after this transition, it will no longer be necessary to compensate miners for the cost of electricity used to perform their work.

This decrease in annual inflation coupled with the destruction of the EIP 1559 should make the issuance of ETH on Ethereum deflationary. According to estimates relayed by ultrasound.money, ETH issuance should become fundamentally deflationary around February 2022.

However, this is not the time to celebrate for the Ethereum community. Indeed, the Poly-Network cross-blockchain protocol has been the target of an attack of a scale never seen before, leading to the loss of 600 million dollars, including 273 million on Ethereum (even if the latest rebounds allow us to hope that all the loot can be finally returned).

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