Ethereum (ETH) has officially become deflationary
Ethereum (ETH) has officially become deflationary

Ethereum (ETH) has officially become deflationary

By Andrea Porcelli - 11 Nov 2022

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Ether, the native crypto on the Ethereum network, officially entered a state of deflation 55 days after “The Merge,” the upgrade that resulted in a transition from Proof-of-Work to Proof-of-Stake.

According to the analytics platform Ultrasound Money, the total supply of Ether after the Merge has decreased by more than 400 ETH ($469,000) as of Wednesday. Ethereum’s deflation rate is currently 0.001% per year. 

Why Ethereum’s deflationary phase comes at a sensitive time

Ethereum supporters are happy that the overall supply of Ether is declining, but this is a worrisome time for the blockchain and cryptocurrency industry. The high-profile event, compared to what happened to the FTX exchange, has increased sales in the crypto market amid fears of widespread contagion.

The percentage of newly issued ETH burned increased by 1,164.06 ETH after the Merge. This means that after the event, almost all of the new supply was burned through the new burn mechanism, which brought a deflationary effect when the network experienced an increase in usage.

According to Bitwise analyst Anais Rachel, “it is likely that all ETH issued after the Merge will be taken out of circulation by the end of this week.”

Ethereum’s Merge was a success, but there are still problems to be solved

The success of the Ethereum Merge is a miracle of technology and a blessing for the environment, but the move from Proof-of-Work (PoW) to Proof-of-Stake (PoS) does not unravel all the kinks and is generating criticism among those who want cryptocurrencies removed from public scrutiny.

Ethereum‘s goal was to create a system where those who want to be validators no longer need large dedicated data centers, but only three pieces of software (an execution client, a consensus client, and a client acting on behalf of the validator) and to pledge 32 ETH as a security deposit.

Critics argue that “the Ethereum Merge” has not solved the underlying problem of cryptocurrencies: the lack of trust of the majority of savers. This mistrust has nothing to do with the power consumption of the system chosen to validate transactions; rather, it is related to the ruinous results of some investments, or known incidents of cyber attacks and scams. Some people perhaps are intimidated by the unfriendliness of graphical user interfaces. Others do not trust a currency that is not controlled by the state.

The community has also expressed concerns about increasing the level of centralization of the network. The centralization aspect became evident soon after the Merge, as 46.15% of the nodes for storing data, processing transactions, and the addition of new blocks on the blockchain belonged to only two addresses.

Despite the criticism, the Ethereum Merge was one of the most significant updates in crypto history. The opinion of many is that the positive elements of the Merge, combined with Ethereum’s versatility, will allow it to withstand the evolution of norms and society better than others.

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