Published: October 12th, 2022
While central bankers around the world grapple with record inflation and its impact on their fiat currencies, Ethereum is dealing with the reverse of that dilemma.
Since last Friday (7th October), the supply of Ether (ETH) has fallen by more than 4,000 tokens. New data from blockchain analytics firm ultrasound.money shows that the price boost one would expected from a sudden drop in supply has yet to happan, and in fact the opposite is occurring. The price of ETH had fallen by close to 3.7 per cent at time of writing, to around USD 1,300.
Since the Ethereum blockchain’s paradigm shift from proof-of-work (PoW) to proof-of-stake (PoS) in September, this is the first period of deflation, where more ETH is burned than generated, that the network has experienced.
Transactions on Ethereum incur ‘gas’ fees, a cost levied in the validation process that’s designed to make the network less vulnerable to being overloaded with malicious requests. It's pure demand pricing, with gas fees rising in tandem with traffic rises on the Ethereum network.
The validators (called ‘Miners’ on PoW networks) who process ETH transactions pocket the fees. However, to keep fees from skyrocketing at peak periods, Ethereum made a change to the blockchain last August that sees a portion of every gas fee automatically destroyed. That limits the supply of ETH in circulation and helps keep gas fees from running out of control, which was a common complaint in the past.
Last weekend, the network flipped modes and began burning more Ether than it created, reducing the total amount of ETH in circulation by more than 4,00 ETH. As of Tuesday, the burn rate was still outpacing the rate of ETH creation.
Average gas fees, meanwhile, have shot up by more than 200 per cent since Saturday and show no signs of let up.
The source of the spiking gas fees may be the launch of a novel token project called XEN Crypto. Data from etherscan.io shows that XEN Crypto transactions drove 40 per cent of the gas fees across the Ethereum blockchain over the past 48 hours.
XEN, which made its debut this past Saturday (8th October), is a cryptocurrency created by crypto entrepreneur Jack Levin. The former Google engineer calls XEN a ‘universal’ cryptocurrency that doesn’t claim any intrinsic value, meaning it can accumulate value as more people use it and take part in the minting process.
On Sunday, etherscan.io says Xen’s price shot up from a fraction of a penny to USD 1.03. Within five minutes it had sunk back to just under a penny, before sinking again to near-zero, where it remains at time of writing.
In the period immediately following the launch, XEN minters paid nearly USD 2 million in gas fees to generate the new (and today, practically worthless) token. Its sudden rise and fall has prompted some crypto commentors on social media to label it a ‘ponzi’ scheme.
The shift from PoW to PoS has had unexpected effects on the Ethereum blockchain and ETH. Alongside the simultaneous loss of value and loss of supply seen this week, crypto traders have seen the price of perennial underperformer Ethereum Classic (ETC) spike in recent weeks.
At the tie, analysts said former ETH miners were looking for alternative ways to make money and continue monetising their investments in expensive PoW mining kit. Ethereum Classic continues to operate under the traditional proof-of-work mining mechanism.
The week of 3rd September, ETC rose by close to 12 per cent in tandem with a rise in the ETH mining hashrate. That represented a surge of over 60 per cent in the past 90 days, rising from USD 21.39 posted in early June. On Proof-of-Work blockchain networks, the hashrate refers to the total computational power required to mine and validate transactions on a blockchain network.
The phrase ‘price follows hashrate’ has become common in crypto trading parlance as changes can signal trends in blockchain activity and transaction volume.
Over the previous 30 days, Ethereum Classic’s hashrate had jumped by 62 per cent. Looking at the past year, hashrate growth for ETC has been a whopping 104 per cent.
The higher the hashrate figure, the safer the blockchain is perceived to be, since high hash rates also tends to keep hackers at bay. The computational power needed to breach the Ethereum Classic network via a ‘51 per cent’ attack, for example, would be immense.
Back in August 2020, the blockhain was hit by a third 51 per cent attack. Hash rate at the time was a measly 2.90 TH/s. Since then, its skyrocketed by 1,600 per cent, creating a massive barrier for any bad actor seeking to break in.
The main driver for the increasing mining activity is widely assumed to be the network merge that sister blockchain Ethereum has scheduled for later in September.
That event will shift the more popular Ethereum blockchain from a proof-of-work (PoW) to a proof-of-stake (PoS) system to reduce its carbon footprint and improve its efficiency.
When it happens, the current mining hardware used by crypto mining companies for Ethereum will be made obsolete. Ethereum Classic and ETC are already benefitting, analysts believe, since miners need an attractive short-term alternative while they reconsider their equipment investments.
Back in June when analysts were wondering just how low ETC’s sister coin ETH could go in 2022.
The price of Ethereum’s native token Ether (ETH) dropped USD 1,000 on Thursday 17th June as the ongoing crypto market sell-off continued to bite.
ETH eventually touched down at USD 975, its lowest level since March 2021 and an 81 per cent dip in value from all-time highs seen in November 2021. The sink happened against worries about US Fed’s looming 75bp rate hike. Skittish investors went on to send stock and crypto markets into bearish territory.
‘The Fed has barely started to raise interest rates and hasn’t sold anything on their balance sheet,’ said Nicholas Dirge, an analyst at data analytics firm Future Insights, at the time. He warned that the situation ‘strongly suggests more downside is on the cards.’