The optimism after the upgrade of "shapella" briefly pushed the price of Ether (ETH) to an 11 month high of around $2150 earlier this month, but has now largely subsided.Ether is a token for Ethereum blockchain that supports smart contracts, with a final transaction price close to $1900
The optimism after the upgrade of "shapella" briefly pushed the price of Ether (ETH) to an 11 month high of around $2150 earlier this month, but has now largely subsided.
Ether is a token for Ethereum blockchain that supports smart contracts, with a final transaction price close to $1900. It has still risen by about 4% this month, but is more than 11% lower than its earlier monthly peak.
Although ETH has been breathing heavily in the past few weeks, analysts remain optimistic about the medium to long term prospects of the cryptocurrency.
This is partly because the macro environment continues to shift towards blue chip (high market value, high trust) cryptocurrencies such as Bitcoin and Ethereum.
With First Republic just taken over by the FDIC, although the Federal Reserve's tightening cycle still has some way to go, it seems to be coming to an end soon, so bank crisis concerns continue to ferment.
This means that blue chip cryptocurrencies may continue to benefit from 1) the hedging demand as a form of currency "substitution" and 2) loose financial conditions (i.e. lower US dollar and US bond yields).
But unlike Bitcoin, Ethereum can also rely on the support of two key deflationary winds that may drive prices up significantly in the coming years.
ETH's supply deflation rate continues to rise
The rate of decrease in ether supply continues to show an upward trend.
On Thursday, the annual destruction rate of EIP-1559 exceeded the ETH issuance rate by 1.753%, and the deflation rate almost reached its annual peak of 3.933% a week ago.
According to chart data provided by the encryption analysis company Glassnode, the net inflation rate has been more or less negative every day since the end of January.
As the rate of deflation increases, it means that individual ETH tokens are becoming scarce at a faster rate. Most analysts believe that in the long run, this should boost the price of cryptocurrencies.
The increase in deflation rate is related to the increase in Ethereum network costs.
The network cost is divided into two parts. The first is the basic fee that all users must pay to ensure that their transactions are accepted and processed on the blockchain.
Then there is an optional tip that users can pay to process their transactions faster.
The Ethereum network automatically calculates the basic cost, which increases when network traffic is high.
The Ethereum Improvement Proposal (EIP) 1559 was implemented into the Ethereum code in August 2021 in the London Hard Bifurcation, and all these basic fees required of users were subsequently destroyed, resulting in the token being permanently withdrawn from circulation.
As a result, as the basic gasoline cost increases, the burning rate of Ethereum also increases.
When the combustion rate exceeds the ETH issuance rate (approximately 0.55%), the ETH supply will decrease.
ETH is issued to protect nodes and stakeholders in the Ethereum network.
The supply of unsecured ETH tokens is rapidly decreasing
As more and more investors mortgage their ETH tokens to ensure returns, the (unsecured) ETH prices may also benefit from a sustained and rapid decline in supply.
Since the introduction of pledge into the Beacon chain in December 2020, the recent "shapella" upgrade has enabled the extraction of unsecured ETH tokens for the first time (up to 50400 ETH tokens per day).
Due to the recent increase in ETH pledge flexibility, investors have been depositing their ETH tokens into pledge contracts at a faster rate than the 50400ETH token withdrawal limit.
According to data provided by Glassnode, on Thursday, the number of pledged ETH tokens reached a historic high of over 19.5 million, an increase of approximately 1.5 million during the month.
Given that the current ETH supply is approximately 120.4 million, this means that only slightly over 16% of the tokens are currently mortgaged.
This is much lower than other tier 1 blockchains that compare proof of ownership, such as Cardano, which typically has a pledge participation rate in 60-70% of supply areas.
As more and more ETH tokens are locked in pledge contracts, they are trapped behind the withdrawal limit of 50400 ETH tokens per day, and the supply of ready (unsecured) ETH tokens in the market decreases, thus increasing scarcity.
In theory, this should push up ETH prices.
The favorable trend of deflation is bound to rebound
It is reasonable to expect that the participation rate of ETH pledge may increase to 40-50% in the coming years, which means that tens of millions of (non pledged) ETH tokens will be removed from the real-time circulation supply.
At the same time, history suggests that Ethereum transaction costs and destruction rates may also soar, leading to a sharp increase in ETH supply deflation rate during this process.
As early as early 2022, network congestion had led to a daily annual ETH (EIP1559) destruction rate often reaching as high as 6.0%.
At that time, the Ethereum blockchain was still supported by the energy intensive proof-of-work consensus mechanism, and because of the much higher energy costs and mining machine costs of miners who provide support for the network, the annual interest rate of Ethereum issuance was much higher, about 4.4-4.6%.
This means that Ether's highest deflation rate is only around 1.5%.
However, if the recovery of the broader cryptocurrency and DeFi markets can push the destruction rate of EIP1559 back to its high point in early 2022, then the new much lower ETH issuance rate (in the 0.5-0.6% range) means that the deflation rate of Ethereum may jump to a staggering 5.5%.
It is worth noting that ultimately, the upcoming Ethereum blockchain upgrade (possibly later this year or 2024), including the implementation of sharding, should reduce transaction costs to control this deflation rate.
The favorable wind of dual inflation is likely to mean that Ethereum outperforms Bitcoin in the upcoming cryptocurrency bull market.
If Bitcoin rises fivefold from its current level to $150000 in the next few years, as many seem to expect, does this mean that Ethereum can rise sixfold or sevenfold and rebound to $10000?
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