The ETH burning EIP1559 part of the London hard-fork was deployed on the Ethereum mainnet on Aug 05. It makes the Ethereum supply dis-inflationary (reduces the rate of inflation by offsetting new issuance through ETH burning). It will also make it deflationary (net issuance becoming lesser than the supply being burned) post Merge. This will happen when the Ethereum blockchain shifts from Proof of Work (POW) to Proof of Stake (POS) – a major requirement for Ethereum 2.0.
In almost one week after EIP1559 activation, ETH burning has approached 25,000+ ETH. The website ultrasound.money reported an average burn rate of 3.19/min. In the same period of time, around 48,000+ ETH completed their issuance. This means that the inflation rate is effectively cut down by half – a significant halvening event.
The top ETH burning protocol is NFT trading marketplace giant OpenSea, followed by the world’s largest decentralized exchange Uniswap and the popular play-to-earn game Axie Infinity. For certain, the burn rate isn’t fixed and depends upon blockchain usage. But the initial results are surprising and likely causing the stellar performance of the ETH token lately.
How Much ETH Burning Will Happen After The Merge?
The Eth1 and Eth2 chains coming together for the Ethereum 2.0 and shift from POW to POS- an event known as the Merge is expected to happen around by the end of the year probably, or if not, by early 2022. It was revealed in a blog post titled “Charting The Path To Proof of Stake Ethereum” by James Beck on June 03 with an article posted below. Currently, Ethereum issues 13,500 ETH per day – yearly percentage issuance of 4.3%. After the merge, depending on the amount of ETH staked, it would drop to 0.3-0.4%. This is a massive decrease in ETH issuance.
Bitcoin currently issues 900 BTCs with an annual issuance rate of 1.4%. Post merge, the Ethereum supply would become more scarce than Bitcoin and is likely to go deflationary with EIP1559 induced base-fee burning. It would take Bitcoin two more halvenings to reach the Ethereum issuance rate range again in 2028. This event of Ethereum becoming ultrasound money is being noted as the triple halvening event – meaning ETH burning will be stronger than ever in the future!
ETH Burning in Numbers
Let’s assume that at the time of the Merge, 10M ETH are being staked on the Beacon Chain contract (the rate is over 6.5M ETH currently) and the base fee is around 35 gwei average, this would mean that daily ETH issuance would be 1,400. However, the fee burn would see 3,500 ETH burning daily, causing the supply to deflationary. It would mean that less than half ETH is being issued than being burned.
Now that we have established a baseline, let’s increase the numbers. Let’s assume that at the time of the Merge, 20M ETH are being staked on the Beacon Chain contract and the base fee is around 70 gwei on average, this would mean that daily ETH issuance would be 2,000. However, the fee burn would see 7,000 ETH burning daily, causing the supply to deflationary. It would mean that less than 1/3 one-third ETH issued than getting burned. It’s a more realistic scenario, considering the usage parameters today. The ETH burning rate is likely to be higher than even this though, seeing that the usage is rapidly rising on the Ethereum network.
The Ethereum Improvement Proposal (EIP1559) will improve the security model, create better fees, burn ETH supply and improve the UX. It replaces the first-price auction model with a more deterministic base fee model, in which the base fee would be burned.
The miners would therefore only profit from the “tip” on the network participant to get their transactions mined faster. EIP1559 also improves the Ethereum long-term security of minimum viable issuance. This happens by not paying miners and later validators any more than is absolutely necessary.
It also allows ETH to become deflationary by causing Ethereum supply reduction proportional to usage and therefore result in rising in its price, by limiting circulating supply. This makes attacks more expensive and the chain more secure, once Ethereum completely switches to Proof of Stake (POS). It also synergistically assists Ethereum Layer 2 solutions, disincentivizes chain spamming further, and breaks economic abstraction.
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