The Merge should have made Ethereum deflationary in theory. This means that more Ethereum disappears than is added on a daily basis. This has everything to do with the burning mechanism built in via EIP-1559 and the loss of the reward for Proof-of-Work miners. However, the reality is that Ethereum is still inflationary, but how can that be?
Lucas Outumoro answers
Lucas Outumoro, the head of research at IntoTheBlock, believes that declining interest in NFTs is a major reason for Ethereum’s disappointing burn rates. According to Outumoro, there is a strong correlation of about 0.58 between the NFT volume and the amount of Ethereum going on the digital pyre.
Before the Merge, Outumoro predicted that Ethereum’s inflation could reach between -0.5 and even -4.5 percent after the transition to Proof-of-Stake. All depending on the height of the gas fees on the platform. However, it now appears that inflation currently at 0.54 percent on an annual basis. It seems that Ethereum needs another bull run to get this percentage below zero.
What is EIP-1559?
EIP-1559 is an improvement proposal for Ethereum introduced last year. The effect of this change is that part of the transaction costs will be burned at the stake. This means that the miners or validators do not get this part of the transaction costs, but that they are lost forever. The higher the transaction costs, the more Ethereum is burned at the stake.
If it becomes very popular on the platform, this could lead to more Ethereum being burned at the stake than new Ethers being created. For example, it is possible that Ethereum will become deflationary in the future, so that the supply will shrink, instead of increasing.
