Ethereum has seen a higher amount of tokens burned than issued for four consecutive days. Is the "deflationary season" arriving early?
With ecological prosperity, Ethereum's phased deflation has become the norm.Author: Kyle, Hive Finance
The utility of the EIP-1559 proposal introduced in the Ethereum London upgrade is becoming increasingly significant. According to data from ultrasound.money, as of November 1, the amount of ETH burned has exceeded 700,000, valued at approximately $3.06 billion.
Based on this burning rate, it is estimated that 3 million ETH could be burned in a year, which is more than half of the current annual issuance of 5.4 million, reducing its annual inflation rate from 4% to 2.1%.
Notably, due to the recent activity in the Ethereum on-chain ecosystem, from October 27 to 31, the amount of ETH burned exceeded the issuance for several consecutive days, resulting in a net supply reduction of 8,571.24 ETH over four days, indicating that its token issuance has temporarily shifted from inflation to deflation.
During this "deflationary season," ETH reached a historic high of $4,460. Meanwhile, as the Layer 1 network on its chain flourished, the Layer 2 ecosystem also experienced rapid growth this year. According to data from L2BEAT, as of October 31, the total locked value (TVL) of Ethereum Layer 2 was $4.68 billion, an increase of 532.43% compared to $740 million two months ago.
According to the latest CME futures weekly report released by the U.S. Commodity Futures Trading Commission (CFTC), from October 20 to 26, the largest ETH dealers increased their long positions from 287 to 383, setting a new historical high. As the Ethereum ecosystem continues to advance, institutional investors have expressed higher expectations through their actions.
ETH Burned Exceeds 700,000, Four Consecutive Days Above Issuance
Since EIP-1559 took effect on August 5, every transaction on the Ethereum chain has burned a certain amount of ETH. After nearly three months of accumulation, as of November 1, the amount of ETH burned has exceeded 700,000, reaching 712,400 ETH, valued at approximately $3.06 billion.
The massive burn amount is attributed to the active application ecosystem on the Ethereum chain. According to data from ultrasound.money, the application that has burned the most ETH is OpenSea, which has burned over 91,800 ETH, followed by Ethereum on-chain transfers, which have burned a total of 66,000 ETH, and Uniswap V2, which has burned 53,000 ETH. Other applications include Tether, Metamask, Axie Infinity, and more.
This ranking based on the amount burned vividly reflects the hot areas of the Ethereum ecosystem over the past few months, including NFTs, trading, stablecoins, and blockchain games.
The ultrasound.money website shows that during the current on-chain boom, approximately 5.63 ETH are burned every minute, valued at about $24,200.
This "burning" speed significantly reduces the inflation rate of ETH. According to the ETH economic model, its annual inflation rate is 4%, with the current annual issuance of approximately 5.4 million ETH, while real-time data estimates that 3 million ETH can be burned each year. This figure has already surpassed half of the issuance, reducing the annual inflation rate to 2.1%.
It is important to note that the above is a relatively macro data point. In recent days, with the acceleration of burning, ETH has entered a phase of "deflationary season."
According to data from OKLink, on October 28, the amount of ETH burned reached 16,910.57, setting a new daily burn record; the next day, the amount burned was also considerable, reaching 16,362.65, the second highest in history.
Recent ETH burn amounts have significantly increased.
From October 27 to 31, the amount of ETH burned exceeded the issuance for several consecutive days, resulting in a total net supply reduction of 8,571.24 ETH over four days, indicating that its token issuance has temporarily shifted from inflation to deflation.
Similar situations have occurred multiple times; on September 3, the amount of ETH burned first exceeded the issuance, and during the subsequent period from September 7 to 9, ETH also entered a deflationary state. It is evident that as the ecosystem develops, periodic deflation in Ethereum has become the norm.
L2 Locked Value Surges, Institutions Increase Long Positions
As ETH enters the "deflationary season," it provides upward momentum for its market capitalization. On October 30, ETH reached a peak of $4,460 in the secondary market, setting a new historical high. Currently, ETH is still fluctuating at high levels, with a price of around $4,300 on November 1.
Some traders believe that as long as the Ethereum ecosystem continues to develop, the token burn rate will continue to rise, and the combination of these two factors will give ETH higher growth potential.
From an on-chain perspective, ETH remains the king of public chains. As of November 1, the total locked value (TVL) of various DeFi protocols on the ETH chain was $136.94 billion, maintaining a normalized high point of "All Time High," accounting for 86.67% of the total locked value of all mainstream public chains in the market.
Nevertheless, network congestion and high transaction fees remain long-term issues for Ethereum. Before the arrival of ETH 2.0, the progress of on-chain scaling is an important criterion for assessing its development.
Recently, at the 2021 Blockchain Global Summit, Ethereum founder Vitalik Buterin admitted that scaling is one of the biggest challenges facing the blockchain field. There are two methods to achieve scaling: one is to increase block size and raise the gas limit, and the other is to use Layer 2 technology. Vitalik believes that Layer 2 is the future of Ethereum scaling, and achieving Ethereum scaling through Layer 2 is the only secure method that can also ensure decentralization.
After initial explorations, the Ethereum L2 ecosystem has experienced rapid development this year. According to data from L2BEAT, as of October 31, the total locked value of Ethereum Layer 2 was $4.68 billion, an increase of 532.43% compared to $740 million two months ago.
Total Locked Value of Ethereum Layer 2 Reaches $4.68 Billion.
Currently, the scaling solution with the highest locked value is Arbitrum, with a TVL of approximately $2.8 billion, accounting for 59.82%; followed by dYdX, with a TVL of $1.01 billion, accounting for 21.66%; and Optimism, with a TVL of $453 million, ranking third, accounting for 9.68%, with a 7-day growth of 65.91%.
The characteristics of the Ethereum L2 network and applications are to significantly improve transaction efficiency and reduce transaction costs without sacrificing decentralization. According to measurements, the gas fee for transactions on Arbitrum is around $5, while trading on the derivatives protocol dYdX does not require gas fees, and the smoothness of contract trading can rival that of centralized exchanges.
The implementation of Layer 2 scaling solutions and the accelerated growth of TVL have brought new growth points to Ethereum. Additionally, the widely anticipated ETH 2.0 has also made new development progress. On October 27, the Ethereum Beacon Chain activated the Altair hard fork upgrade, bringing it one step closer to its goal.
The Layer 1 network and L2 are advancing simultaneously, coupled with the arrival of the "deflationary season," the market is raising its expectations for Ethereum.
Recently, the U.S. Commodity Futures Trading Commission (CFTC) released the latest CME futures weekly report. The report shows that from October 20 to 26, the largest ETH dealers increased their long positions from 287 to 383, setting a new historical high, while short positions decreased from 58 to 31. Dealers' accounts made net long adjustments during this period, indicating that institutional investors are optimistic about Ethereum's future.
Previously, several industry insiders predicted that ETH's market capitalization would gradually surpass BTC's. Currently, ETH's circulating market capitalization is $511.198 billion, still a significant distance from BTC's $1.17 trillion market cap. However, with the increasing deflationary pressure on ETH and the development of Layer 2, the "throne battle" in the crypto market is becoming increasingly interesting.
