The Ethereum network completed one of its most talked about upgrades (the Merge) last month. The Merge saw the network switch from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS). However, the blockchain has experienced deflationary situations after the Merge.
Many crypto experts predicted the drop in Ethereum after the Merge. While their predictions have come true, there have also been changes to Ethereum supply circulation following the Merge. Data from crypto analytics firm, UltraSound Money, states that there has been a drop in the daily amount of ETH in supply circulation.
The data claims that the drop hit nearly 90 percent since the upgrade. The switch to a PoS network could be the reason for the decline, as Ether is no longer mined.
Burning Mechanism And Drop In Ethereum Supply Circulation
Ethereum supply circulation has been dropping steadily in the last five days. Within this period, multiple data estimated a decline of nearly 5,500 ETH in the supply circulation of the second-largest digital asset. Some analysts attribute the drop to the EIP-1559 and the coin’s burning mechanism.
The burning mechanism makes it mandatory to burn a percentage of the charges for ETH transactions. The Merge also means that the network no longer pays its miners any amount for the ecosystem’s security or transaction processing.
That wasn’t the case before the PoS switch, where miners were receiving nearly 13,000 ETH as rewards from the Ethereum network. Following the Merge, the network now issues about 1,600 ETH as daily rewards to validators. It burns the base fees for ETH transaction processing. Consequently, Ethereum will become deflationary, especially with an increase in usage.
About 7,525 ETH is now available on the market in new token supply. This value represents a drastic drop, given that the amount would have been nearly 340,000 ETH if ETH was still a PoW network. Ethereum’s burning mechanism needs to remove more ETH tokens from circulation.
The network’s foundation estimated that if its gas price reaches 15 Gwei, then ETH would become deflationary. Ethereum supply would keep declining since the amount of burnt tokens is significantly larger than the rewards for stakers.