Ethereum (ETH) reached an all-time high price of $4,878 on November 10, 2021, as well as an all-time high market cap of $548.4 billion on the same date. Two years ago, the Ethereum Network implemented a few updates that drastically changed the supply dynamics for Ether, the native token.
However, even with all the changes, ETH is still affected by its token’s inflation. Considering data retrieved by Finbold on August 18, with a circulating supply of around 120.21 million ETH, one Ether would be worth close to $4,570 — $308 (6.3%) less than its price all-time high in US dollars.
The first change to Ethereum’s code to impact the token’s supply was called the London Upgrade, made on August 5, 2021, which introduced the burning mechanism as described by the Ethereum Foundation:
“The London upgrade introduced EIP-1559, which reformed the transaction fee market, along with changes to how gas refunds are handled and the Ice Age schedule.”
While the second relevant change was called The Merge (or Paris), which took place on September 15, 2022 — one year after the ‘burn.’ Paris merged Ethereum’s blockchain with the Beacon Chain, switching the old Proof-of-Work (PoW) consensus mechanism to a more efficient Proof-of-Stake (PoS), reducing ETH’s emission through block subsidy, as entities’ costs to maintain the network were drastically reduced.
Ethereum supply inflation and gas fees
Since then, a little over 3 million ETH have been added to Ether’s circulating supply. As a result of 6.56 million ETH issued through the payment of the block subsidy to Ethereum’s validators, less an amount of 3.55 million burned ETH from the share of the gas fees paid by Ethereum users.
It’s estimated that Ether has a yearly inflation rate of 1.26%, as opposed to an expected yearly inflation rate of 3.16%, in case ‘The Merge’ did not take place.
At current rates, it’s also expected that the network burns an average of 1.75 million ETH per year, but these numbers are directly correlated to the network usage. The more people use the Ethereum Network, paying more gas fees to transact or deploy smart contracts, the more ETH will be burned — and the opposite is equally true.
Recently, Visa (NYSE: V) introduced the possibility for users to pay their gas fees on Ethereum with a Visa Credit Card, thanks to another change in the protocol called Address Abstraction (ERC-4337). This could also impact fee expenditures, impacting the burn amount, and the projected price for 1 ETH in the future, according to its all-time high market cap.
ETH was changing hands as low as $1,680 on August 18, after massive losses that affected the whole crypto market, registering over 11% in losses in the last 30 days.
There are no guarantees that ETH will ever reach its all-time high market cap of $548.4 billion, depending entirely on further development, news, sentiment, and demand for the Ethereum ecosystem. Therefore, it’s also possible that the second-largest cryptocurrency could overcome this historic mark.
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