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EIP-1559 was supposed to put the network under deflationary pressure. It’s effective.
EIP-1559 was implemented to Ethereum last month with the intention of slowing the rate at which the supply of ETH rises. However, the supply of ETH has not increased in the recent 24 hours. It’s getting smaller.
Over the last 24 hours, more Ethereum has been burned on the network than has been produced, implying that there is less ETH accessible now than there was yesterday. According to Ethereum specialists, this is a first for the network.
EIP-1559 was a proposed coding update to the Ethereum blockchain that would allow block sizes to be increased so that more transactions may be routed across the network. Because of the popularity of NFTs and decentralised finance apps like loan protocol Aave and exchange Uniswap, the Ethereum network has experienced congestion, as such tools consume the network’s limited resources.
The idea included a need for a flat fee for each transaction. Instead of continuing to go to the miners who validate network transactions, the base fee would be burned (i.e., removed from circulation by being deposited to an unaccessible wallet). The idea was to reduce the total supply of ETH, which, unlike, has no eventual cap. As a result, the price of Ethereum would theoretically rise to meet demand.
While EIP-1559 reduces the rate at which ETH supply grows, it does not necessarily lower the supply of ETH. That’s because, with each block produced, miners still get to keep the newly mined ETH. As long as the amount of newly mined ETH is higher than the base fees burned, the overall supply of ETH increases.
That is no longer the case, at least not anymore.
The supply growth went negative in a 24-hour period encompassing Thursday and Friday. More ETH was destroyed than the 12,500 to 13,000 ETH handed to miners. This is possible because the base cost adjusts upward during periods of increased demand for Ethereum transactions. (Was it DeFi’s money? Purchasing NFT? Gaming?)
According to Scott Lewis, co-creator of DeFi Pulse, and Evan Van Ness, founder of Week in Ethereum News, this is the first instance of Ethereum become deflationary.
Since the code change went into effect on August 5, over 188,000 ETH has been burned, according to EIP-1559 tracking website Ultrasound Money. Per pricing from Nomics, that’s the equivalent of $736 million.
The change has directly fueled a price rise for the currency. Ethereum has climbed from $2,516 on August 4 to $3,926 today—a 56% increase in one month.