Staking, Demand, Locked Tokens, Slow Mining: Ethereum Turns Deflationary

Ethereum (ETH) may face a shortage of physical coins as its network has turned deflationary. Even at a supply of 120M, Ethereum demand is higher than supply. More coins are needed for staking and various security deposits, leaving less ETH to trade or move freely. 

Ethereum Usage Increases Token Burning

Ethereum is essentially the backbone of the current DeFi sector. Despite scalability issues, coins on the original blockchain are still needed and are even more valuable. One of the main drivers of ETH scarcity are the daily token burns, which accelerate with more transactions. 

#ETH supply is decreasing at an alarming rate. If this weekly rate continues for a year we will see over 1.2% of the supply burned

These are the metrics that the media will force feed everyone after the spot ETFs come out

🔸Deflationary
🔸Staking APY
🔸Harder than gold pic.twitter.com/DtpbEVOr42

— Renata hall (@renatahall2947) May 1, 2024

During the peak NFT and DeFi market, Ethereum introduced the Ethereum burn program in late 2021. After the EIP-1559 upgrade, Ethereum introduced a new fee and block production schedule, where miners receive a base rate and all excess fees are burned. 

End users still may need to pay a relatively high fee for moving their ETH, but block producers will not be able to receive the excess funds. The fee burn program took off like wildfire, and so far the Ethereum network has burned coins worth about $12B based on market estimation. 

Liquid Staking Platforms Control Large Part of ETH Supply

ETH owners have always desired to make use of their tokens, and liquid staking is a tool that aids in achieving that. Holders can now pledge their 32 ETH to secure the network while using the same liquidity in other ecosystems. 

The Lido liquid staking platform now draws in more than 28% of the ETH supply. 

⚪️ #DeFi #Facts ⚪️
Lido, the largest liquid staking protocol, controls over 28.5% of all staked Ether has just achieved a new milestone with 1M validators on the protocol…👀🤍#Lido #Ethereum #ETH #Staking pic.twitter.com/viA3OS9TEr

— All Facts Crypto (@AllFactsCrypto) May 1, 2024

More than 44M ETH are locked for securing the network. Lido and EigenLayer enable users to create value in new layers by utilizing tokens as collateral. A smart contract transparently locks the actual tokens, prohibiting their movement or sale on the market. 

Ethereum reports more than 122M in circulating supply, though there is some conflicting information. According to the burn tracker, the supply has diminished to 115M. For now, the network is experiencing slow deflation, solving the problem with the still un-capped supply. 

Ethereum Abandons Idea to Freeze Production

The older roadmap for Ethereum was to stall production at around 87M ETH. Initially, miners would be discouraged by making it too difficult to produce new tokens, leading to a mining ice age. But miners declined, stating fees were not enough to motivate them. With a mix of mining and staking, the Ethereum Foundation plans to continue producing blocks indefinitely. 

Token burns are achieving the supply drop, though not reaching the intended target of having less than 100M tokens. But staking and collaterals also turn ETH into a store of value. Over time, people may hold ETH for its value and only rarely use it for direct on-chain actions. 

Currently, multiple L2 networks offer scaled transactions that do not require Ethereum gas, but are still secured through the Ethereum network. 

The deflationary trend may also reverse, if fee burning and usage slows down. But during the bull market, increased Ethereum usage contributed to accelerating deflation and may have boosted the ETH market price. 

The Ethereum supply chart reveals a surprising inflation spike after five months of deflation.

Despite this, Ether's price remains stable above $3,200. $ETH holders anticipate the SEC's decision on the Spot Ether ETF, which could be a major catalyst for Ethereum's future.… pic.twitter.com/PIGRgKNUS6

— alpha CAPCOM (@alphacapcom) April 28, 2024

As of May 2024, Ethereum remains deflationary with 1.2M transactions per day and their related fee burns. 

Ethereum Still Not Easily Replaced

Ethereum remains a highly secure network, even after phasing out the mining component. The high requirement of staking means it is too expensive to mount an attack. 

Despite the high fees and the creation of multiple L1 networks, Ethereum is still the go-to network for many projects and NFT collections. Migrations are also difficult and time-consuming. For now, projects discover workarounds such as L2 solutions, wrapped assets, synthetic tokens and off-chain computation. 

But some tokens are looking for multi-chain solutions and may transfer their activities to new blockchains.

The $HEX community spent $32 Million on #ETH gas fees last cycle just interacting with the HEX contract (staking and unstaking)

They spent over $150 Million in ETH gas fees when you include swaps, transfers etc

Can you imagine the price of HEX if the $150M was used to buy?… pic.twitter.com/KdYvL6Kw1l

— KatieePCrypto.pls (@KatieePCrypto) April 29, 2024

Ethereum is still highly usable for decentralized trading, as most of the prominent DEX have an Ethereum version.

Will ETH Reach Extreme Valuations

The recovery of ETH close to $4,000 during the current bull cycle was partly due to the fee burns and locked tokens. 

But long-term ETH price predictions still exist, as investors await the bull market to return in 2024 or 2025. For Ethereum, the price target of $10,000 has been talked about for years. So far, ETH has traded at four-digit prices, but only went close to $5,000 briefly. 

After the latest price correction, ETH dipped to $2,910.61, after briefly recovering above $3,300.