The long-awaited Ethereum merger took place in September, moving it from a legacy proof of work (POW) sustainable development model proof of stake (PoS) consensus algorithm. Many observers expected Ether (ETH) price to react positively as its daily emissions decreased by 90% with the shutdown of mining operations.
However, the expected price spike never happened. In fact, Ether is down over 7% since the upgrade. So why didn’t the merger drive up the price of the coin?
Post-merger ETH monetary policy
Ethereum’s monetary policy was simply to reduce the token supply to 1,600 ETH per day. The PoW model, an equivalent of 13,000 ETH were issued daily as mining rewards. However, this was eliminated entirely after the merger, as mining operations are no longer valid on the PoS model. As a result, only the 1,600 ETH supply remains for staking rewards, reducing its daily supply by 90%. If the average gas price on the Ethereum network became at least 16 gwei, the 1,600 ETH would be burned every day, making Ethereum inflation zero or even triggering deflation.
This monetary policy has been a key driver of rising Ether price expectations. However, users failed to consider the impact of marketing sentiment and regulatory changes. The deflationary model was established to have a long-term impact on the price of ETH when blockchain supply growth is in the negative zone.
The growth in token supply since the merger was -0.01%, meaning roughly the same amount of ETH was produced as the amount burned through transaction fees. Although this metric indicates deflation, it is not substantial in raising the price of the token, especially when liquidation remains high in the crypto market.
The State of ETH Deflation
Currently, ETH is deflating. The number of tokens in circulation has dropped by more than 10,000 in the past two weeks, while 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 inflation. Since then, more tokens have been burned through transaction fees, making ETH deflationary.
Over 49,000 ETH has been burned in the past 30 days, at an average rate of 1.15 tokens per minute. It looks like Ether supply has peaked and supply growth will continue to decline significantly. So what happened on October 8 that first triggered this deflation?
This was mainly due to a new blockchain project called XEN Crypto. Since its launch, XEN Crypto burned over 5,391 ETH in transaction fees, making it second in the ETH Burned chart, slightly behind Uniswap V3. The transaction and minting rate of ERC-20 tokens was significant between October 8 and 15. The average gas price that week was 37 gwei, more than double the “ultrasonic barrierof 15 gwei, which triggered this deflation.
For now, as long as Ethereum’s gas price remains above 15 gwei, the network will burn enough tokens to keep it deflationary.
Why is the price of Ether not increasing?
Although the mechanism introduced by the merger and the current state of deflation are technically supposed to drive prices up, the timing is just not right. The prices of any cryptocurrency are not only based on its supply and burn mechanism – liquidation also plays an important role.
The US Federal Reserve has aggressively raised interest rates in recent months. As a result, government bonds have produced significant returns, and these bonds are much less risky than crypto. There is also more regulatory pressure on the crypto space, and with the recession raging, short-term investors are moving away from volatile assets.
Related: Post-merger ETH has become obsolete
coin glass Data shows that ETH liquidations have been particularly high over the past two months. This is mainly the reason why the price of ETH did not rise and instead fell despite its deflationary status.
Deflation: a long-term impact
Overall, deflation will certainly have a long-term impact. If a bullish cycle appears, it will lead to increased use of the network, thereby increasing gas prices. This will lead to a more substantial decrease in the supply of tokens and a possible price spike may appear. The sell-off has slowed in recent days as ETH prices appear to have hit a sustainable resistance level. However, whether or not a bull cycle occurs will depend on market sentiment.
Yakov Levin is the founder and CEO of Midas, a custodial crypto-investment platform for DeFi assets.
This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.