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Ethereum’s long-awaited merge took place in September, moving from the traditional Proof of Work (POW) model to a sustainable Proof of Stake (PoS) consensus algorithm. Many observers expected the price of Ether (ETH) to react positively as daily emissions fell by 90% due to the shutdown of mining operations.
However, the expected price spike never happened. In fact, Ether is down over 7% of his since the upgrade. So why didn’t the merge boost the coin’s price?
Ethereum’s monetary policy was to reduce the token supply to 1,600 ETH per day. A PoW model worth 13,000 ETH was issued daily as a mining reward. However, it was completely removed after the merge as the PoS model is no longer valid for mining operations. Therefore, only 1,600 ETH supply remains in staking rewards, reducing the daily supply by 90%. An average gas price of at least 16 gwei on the Ethereum network, consuming 1,600 ETH every day, could lead to zero inflation or even deflation on Ethereum.
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This monetary policy was a major factor in Ether price appreciation expectations. However, users did not consider marketing sentiment and the impact of regulatory changes. The deflationary model was established to influence the price of ETH in the long term when blockchain supply growth is in negative zones.
Token supply growth since the merge was -0.01%. This means that almost as much ETH was generated as was burned by transaction fees. Although this indicator shows deflation, it is not enough to increase the price of the token.
Currently, ETH is contracting. A total of 3,037 new tokens have entered the market since the merger, although the number of outstanding tokens has dropped by more than 10,000 over the past two weeks. The supply of new tokens increased until October 8 as Ethereum continued to inflate. Since then, more tokens have been burned by transaction fees, and ETH has been in deflation.
Over 49,000 ETH have been consumed in the last 30 days, with an average rate of 1.15 tokens per minute. Ether supply appears to have peaked and supply growth continues to decline significantly. So what happened on his October 8th that caused this deflation for the first time?
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This is mainly due to a new blockchain project called XEN Crypto. Since launch, XEN Crypto has burned over 5,391 ETH in transaction fees, coming in second on the ETH Burned leaderboard, just behind Uniswap V3. Between October 8th and October 15th, there was a significant increase in the rate of transactions and mining of his ERC-20 tokens. The average gas price for the week was 37 gwei,ultrasonic barrierThe trigger for this deflation was 15 Gwei’s “”.
For now, as long as Ethereum gas price stays above 15 gwei, the network will burn enough tokens to sustain a deflationary state.
The mechanisms introduced by mergers and the current state of deflation are technically supposed to push prices higher, but the timing is simply not right. It is not based, and 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 bonds are generating substantial yields, and these bonds are far less risky than cryptocurrencies. Short-term investors stay away from volatile assets.
Related: ETH after merge is deprecated
coin glass data indicates that ETH liquidations have been particularly high over the past two months. This is mainly why the price of ETH did not rise despite the deflationary situation, but instead fell.
Overall, deflation will certainly have an impact in the long run. When a bullish cycle appears, network usage increases and gas prices rise. This could significantly reduce the token supply and cause the price to skyrocket. Liquidations have slowed in recent days as the price of ETH appears to have reached a sustainable resistance level. However, whether a bullish cycle emerges any time soon depends on market sentiment.
Iakov Levin Founder and CEO of Midas, a custodial crypto investment platform for DeFi assets.
This article is for general information purposes and is not intended, and should not be construed as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author and do not necessarily reflect or represent the views or opinions of Cointelegraph.
