Deflation mechanism after ETH upgrade: Will ETH become more scarce?

The upgrade of Ethereum (ETH) has introduced a deflation mechanism, making it gradually scarce. The transaction fee combustion mechanism of EIP-1559, the lower ETH issuance rate under the PoS consensus mechanism, and active ecological activities have all promoted the destruction of ETH and reduced its supply. However, the scarcity of ETH is not entirely certain. For example, future technological upgrades, such as EIP-4844, may reduce transaction fees and reduce ETH destruction; market sentiment, macroeconomic situation, and changes in regulatory policies may affect the demand and price of ETH, thus posing a challenge to its scarcity.

After the upgrade, the corresponding deflation mechanism is set. Under the combined action of multiple factors, ETH tends to become more scarce, but there are also some uncertain factors that make its scarcity challenge. The specific analysis is as follows:

The deflation mechanism makes ETH scarce

• EIP-1559 Destruction Mechanism: EIP-1559 introduced a transaction fee combustion mechanism in 2021, and the basic fee in each transaction will be permanently destroyed. When network activity is active, such as Ethereum online transactions are frequent from the end of 2022 to the beginning of 2024, a large amount of ETH is destroyed due to transactions, which directly reduces the amount of ETH in circulation.
• PoS low issuance rate: After the "merger" in September 2022, Ethereum has changed from PoW to PoS mechanism, and the issuance rate of new ETH has been significantly reduced. In the PoW era, about 13,000 ETHs were dug out every day, while the number of newly issued ETHs per day under the PoS mechanism dropped to about 1,600, and the annual issuance volume dropped from about 4.8 million to about 584,000, and the inflation pressure was greatly reduced.
• Ecological activities promote destruction: The activity of the Ethereum ecosystem will promote the destruction of ETH. For example, the NFT market was booming in 2023, and transactions on platforms such as Opensea were frequent, and popular NFT series transactions brought a large amount of ETH destruction. At the same time, lending, trading and other activities on DeFi platforms such as Uniswap and Aave have also increased significantly, and the transaction fees generated are destroyed by the combustion mechanism, further reducing the supply of ETH. In addition, the rapid growth of Layer2 expansion solutions has also led to the continuous incurring main network transaction fees, accompanied by a large amount of ETH burning.

Uncertain factors may affect scarcity

• Changes brought about by technology upgrades: EIP-4844 in the "Dencun" upgrade in 2024 introduced a new data storage mechanism, which significantly reduced transaction fees, led to a reduction in ETH destruction, causing a certain degree of inflation in Ethereum in 2024, indicating that there is uncertainty in the impact of future technology upgrades on ETH supply.
• Market and macroeconomic factors: The cryptocurrency market is greatly affected by market sentiment, investor preferences, macroeconomic situation, etc.If the market is generally sluggish and investors sell ETH in large quantities, it will increase market supply; macroeconomic fluctuations may also lead to investors' funds withdrawing from the crypto market, affecting the demand and price of ETH and weakening its scarce asset attributes.
• Regulatory policy risks: The regulatory policies of various countries for cryptocurrencies are different and constantly changing. If strict regulatory policies are introduced to restrict the use, transactions or pledge of Ethereum, it may undermine market confidence, affect the development of the Ethereum ecosystem, and thus affect the demand and supply of ETH, making it difficult for it to become a scarce asset.

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