In 2023, the total amount of ethereum (ETH) in circulation has already decreased by 66,000 units. This is all due to EIP-1559 and the introduction of the Proof-of-Stake consensus mechanism in September 2022. Time to find out together exactly how that works and how there is no inflation within ethereum, but deflation.
EIP-1559 and Proof of Stake
Starting with EIP-1559, this update to Ethereum caused some of the transaction fees to end up on the digital pyre. In effect, this means that about half of all the transaction fees people pay in ether will disappear from circulation for good.
That ensures that a fair amount of ether is destroyed on a daily basis. However, in the Proof-of-Work era of Ethereum, that was not enough to go from inflation to deflation.
Miners received so much ether for producing blocks that burning via EIP-1559 failed to keep inflation below zero. The arrival of Proof-of-Stake changed that.
In 2023, the supply of Ethereum reduced by 66k $ETH due to burning a fraction of transaction fees. This move has made Ethereum deflationary, which is great news for crypto enthusiasts seeking scarce digital assets. #Ethereum #deflation pic.twitter.com/2RuwiioffW
— IntoTheBlock (@intotheblock) March 18, 2023
Since then, producers of a block receive a lot less ether as a reward. In 2023, this has so far resulted in 66,000 ETH having already been withdrawn from circulation.
Ethereum Shanghai Upgrade
In principle, this should have an upward effect on the price. After all, it ensures that fewer and fewer ethers come onto the market for sale. A mechanism that had a similar effect in recent years was the Beacon Chain’s Proof-of-Stake contract.
So far it is not possible to withdraw ETH from this contract. If you choose to stake your ethers on the new Ethereum blockchain, then you’ll have to wait for the Shanghai upgrade to untie it.
As a result, billions of dollars worth of ether are currently tied up in the Proof-of-Stake contract. At the beginning of April, however, the time has come and the Shanghai upgrade will be released. In theory, this could mean that people will soon withdraw ethers en masse from the Proof-of-Stake contract and throw them up for sale.