The London hard fork, a significant upgrade implemented on the Ethereum ($ETH) mainnet, has resulted in the burning of a staggering 3.46 million ETH tokens, worth over $6.5 billion. This phenomenon stems from the implementation of the Ethereum Improvement Proposal (EIP) 1559, which revolutionized the way transaction fees are handled on the network. With the shift to a new fee structure, a portion of the base fee is burned with every transaction, effectively reducing the circulating supply of Ethereum.
EIP 1559: Changing Transaction Fee Mechanisms:
Prior to the London hard fork, Ethereum used an auction system for transaction fees. However, EIP 1559 introduces a new approach where users pay a basic fee to have their transactions processed by miners. Moreover, users have the option to tip miners to speed up their transactions. The base fee, instead of being paid to the miner, is burned, permanently removing Ether from circulation. The base charge fluctuates based on network demand, rising during periods of high demand and decreasing during low demand.
Impressive Scale of Ethereum Supply Reduction:
The incredible scale of reducing the supply of Ethereum through burning can be appreciated by the fact that $6.68 billion worth of ETH being gutted could buy about 19,085 single-family homes, assuming an average price of $350,000 per residence. This serves as evidence of the significant impact of the burning mechanism on the circulating supply of Ethereum, as reported by Benzinga.
Causes of Decreasing Ethereum Supply:
Regular ETH transfers account for a large part of the Ethereum network’s shrinkage, resulting in nearly 300,000 ETH being burned. Notably, transactions involving non-fungible tokens (NFT) on Opensea have contributed to the burning of more than 230,000 tokens. Moreover, the popular decentralized exchange Uniswap has been responsible for burning 200,000 ETH.
Ethereum Merger Effects:
Since the transition of the Ethereum network from Proof-of-Work to the Proof-of-Stake consensus algorithm, known as Ethereum Merge, the circulating supply of the network has steadily decreased. Without the Merger, the network will generate an additional 6.5 million ETH. As a result, the current supply of Ethereum is decreasing by around 0.1% annually, effectively offsetting the issuance of new tokens. Had the Merger not taken place, the supply of cryptocurrencies would have increased by around 3.3% every year.
The London hard fork and implementation of EIP 1559 has brought about a significant reduction in the supply of Ethereum circulating through the burning of ETH tokens. With over $6.5 billion of ETH already burned, the upgrade has proven successful in reducing supply and potentially increasing the cryptocurrency’s scarcity and value. As Ethereum continues to evolve and adapt, the burn mechanism stands as a critical element in the ongoing development of the network’s economic model.