Due to a substantial post-Shapella supply increase, the Ethereum cryptocurrency, Ether (ETH), hit $2,100 for the first time since May 2022.
On Wednesday, Ethereum programmers managed to ship the “Shapella” version, which is a combination of the Ethereum (Shanghai) and execution (Capella) consensus layer names. Since December 2020, ETH and ETH denominated staking rewards can be withdrawn from staking smart contracts.
Some analysts worry that allowing withdrawals will increase short-term selling pressure on the Ether market as holders cash in on accrued profits and the nearly 200% increase in ETH price since December 2020.
However, on-chain data revealed that ETH tokens staking on the Ethereum blockchain jumped 100,000 on Thursday, its biggest one-day gain in over two months.
Instead of withdrawing the staked ETH to pay, more investors staked their Ether tokens after the successful Shapella update. When more ETH tokens are locked in staking contracts, the number of ETH tokens that are not accessible for trading on cryptocurrency exchanges falls.
Given the recent market fluctuations, this could increase the price of ETH. The rise in Ethereum prices is also likely due to the relief that no ETH flood has yet entered the market, adding to the selling pressure.
By staking withdrawals, more ETH investors will stake their tokens for returns. Investors in liquid staking protocols (for example, Lido stETH token buyers) should expect a dividend of 4-5%, but this will fall as the amount of ETH staked increases.
Thursday saw 18.25 million ETH tokens staking. That is 15% of the 120.4 million Ether supply. Other comparable proof-of-stake blockchains, such as Cardano, have much higher staking participation rates of 60-70%.
As previously pointed out, if ETH holders keep their ETH in contracts for a long time, the supply of ETH in circulation will decrease. This probably increased the price of ETH almost in a deflationary manner. Before considering the deflationary nature of the ETH supply.
After August 2021, ETH paid in transaction fees is permanently removed from supply. While Ethereum is a proof of work network, miners receive a 4% annual incentive, which makes Ether’s inflation rate unpredictable.
This inflation rate is mostly positive until September 2022, when proof-of-stake replaces proof-of-work. ETH stakeholders now receive an additional 0.55% of tokens annually instead of 4%.
Network activity has increased transaction costs and burn rates this year. The net ETH inflation rate has been negative for months due to the low ETH issuance rate. As the crypto bull market develops, network activity and fees tend to rise, which may lower them even more.
Simply put, ETH price is expected to benefit from the twin strong deflationary tailwinds going forward as 1) more ETH is withdrawn from supply and placed in staking contracts, and 2) token burning continues to reduce supply.
Despite the rise of the crypto bull market, on-chain network utilization fundamentals remain weak, with high transaction fees pushing users towards Ethereum’s layer-2 scaling solutions such as Polygon and Arbitrum and rival chains such as Solana.
However, the deflationary tailwinds in ETH supply and the anticipation that Ethereum is solving its scalability issues imply that the fundamentals of the Ethereum network will have to sustain price into the foreseeable future.
Medium to long term risks favor a continued rise in ETH prices in the coming months as US inflation continues to fall and recession risks increase, increasing the likelihood of a cycle of Fed rate cuts. Short term technicals are also positive.
Experts consider ETH’s recent support at the 21-Day Moving Average as a market vote of confidence in the short-term positive price momentum. ETH main moving average is rising. The gold cross in early February and the strong rebound from the 200 DMA in mid-March are positive medium to long term technical indications.