Ethereum supply is shrinking again. here’s why
Key points to remember
- ETH has turned deflationary over the past 24 hours.
- The high gas consumption to create tokens for the new XEN Crypto project is the main cause for the drop in ETH supply.
- The supply of ETH has started to drop several times since Ethereum completed “the merger” in September.
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The Ethereum network has entered its longest period of symbolic deflation since “the meltdown”.
A new Ethereum gas consumer
The supply of ETH is decreasing again.
Ethereum gas fees rose over the weekend after the launch of a new token airdrop. Users of the leading smart contract network have been rushing to mint XEN – the token of a newly launched crypto project – straight into their wallets for free. The catch is that it costs a small amount of gas to do so.
XEN Crypto rolled out its contracts on Ethereum on Sunday, marking the launch of the project and the start of token minting. The project is the brainchild of early Google engineer and serial entrepreneur Jack Levin. According his website, XEN is based on the first principles initiated by Satoshi Nakamoto in the Bitcoin white paper. The protocol is permissionless, fully on-chain, and decentralized. There was no pre-sale or token sale, which means market forces and game theory surrounding the project will alone dictate the price of XEN going forward.
The reason XEN minting consumes large amounts of gas on Ethereum is because every address on the network has the right to mint XEN. The amount of tokens each user receives is based on a complex formula that takes into account how many people have interacted with the smart contract before them and how long a user is willing to wait to receive their tokens. As time passes since launch and more people move up, creating XEN becomes increasingly difficult, with longer waiting periods required to receive the full allocation of tokens. .
The XEN Project also makes no effort to prevent users from attacking Sybil, where opportunists create multiple addresses and claim tokens on each. As there is an incentive to hit XEN early to sell the tokens immediately or receive a larger amount by locking them up, the airdrop has created a “gold rush” scenario where XEN is the gold and ETH is the pickaxe. necessary to operate it.
Ethereum feels the burn
Over the past 24 hours, XEN token minting has consumed 1,470 ETH in gas fees, or about 40% of total gas spend on the Ethereum network, per Etherscan data. As a result, average Ethereum transaction fees have always ranged between 15 and 32 gwei, which is enough to push the amount of ETH burned in transactions above that issued to validators on the network. When more ETH is burned than what is rewarded for the stakers, it leads to a decrease in the total supply of ETH.
According ultrasound data.money, the circulating supply of ETH has increased from 120,534,186 to 120,531,045 since the launch of XEN Crypto. In the context of the current use of gas, the total supply of Ethereum is expected to decrease by 0.45% per year, or approximately 1.25 million ETH tokens. However, it is unlikely that the XEN minting will be able to sustain this demand for Ethereum usage in the long term. As those minting XEN will aim to sell their tokens for more than the cost of the gas it took to mint them, higher gas prices discourage minting.
Yet, as XEN inflation decreases with time and the number of addresses minted, over a long enough period, it can become profitable to mint XEN when gas prices are low. The project will likely need to provide use cases for XEN to keep Ethereum users interested and demand for the token.
When Ethereum moved to proof-of-stake on September 15, it decreed a major reduction in the supply of ETH. Prior to the merger, the Ethereum network paid around 13,000 ETH per day to miners as block rewards for processing transactions and securing the network. Now, Ethereum uses proof-of-stake, with rewards distributed to validators equating to around 1,600 ETH per day, an almost 90% drop in issuance. As the base fees for processing Ethereum transactions are burned, the network can become deflationary during periods of high usage.
Disclosure: At the time of writing this article, the author owned ETH and several other cryptocurrencies.