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Cryptocurrency’s Ethereum Merge Vaults Surpasses Bitcoin in Hard-Money Allure

Atomic Composibility
Atomic Composibility

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Two weeks ago, Ethereum received praise and attention for successfully completing its highly-anticipated Merge, a historic switch to a new “proof-of-stake” blockchain architecture intended to significantly reduce energy consumption—by as much as 99%, according to some estimates. Now, it seems as though the second-largest blockchain is delivering on another promise made during the Merge: increased inflation resilience, a quality that is typically more closely linked to Ethereum’s bigger and more well-known rival, Bitcoin.

According to Lucas Outumuro, head of research at cryptocurrency analytics and analysis company IntoTheBlock, the annualized net issuance rate of ether (ETH), the native coin of Ethereum, has decreased to a range of 0% to 0.7% in the days following the Merge. Comparatively, 3.5% existed before to the Merge. The new supply divided by the current supply is essentially what determines the net issuance rate, often known as the inflation rate.

Based on data demonstrating that around 8,100 ETH have been added to the total amount of ether since the Merge, the website Ultra Sound Money estimates the annualized inflation rate to be 0.19%. Ethereum’s lower issuance rate could increase its appeal to investors in both the crypto and traditional markets in a world where central banks are fighting to control inflation in the face of massive money printing and severe supply-chain bottlenecks.

According to Woobull.com, the current net issuance rate for Bitcoin is approximately 1.75 percent. Since March 2020, the Federal Reserve has increased the size of its balance sheet by two times, to around $8.9 trillion. “The amount of new tokens entering the network has significantly decreased.” In a report posted on Monday, market analyst Simon Peters of the trading platform eToro wrote.

Due to changes to the core blockchain architecture and another process known as “EIP 1559,” fees paid for network transactions are “burned,” or removed from circulation, which together account for the decrease in Ethereum’s inflation rate.

According to the Ethereum Foundation, the issuance of ether’s proof-of-work (PoW) mining rewards was roughly 13,000 ETH every day prior to the Merge. Following the Merge, mining incentives ceased to exist, and theoretically, staking rewards would amount to roughly 1,600 ETH daily, representing a 90% reduction in new issuance.

The amount of ETH burned typically varies depending on the base charge adjusted by how congested the data blocks are on a given day. A greater base cost applies when there are more transactions.

According to Daniel Kostecki, senior market analyst at the investment firm Conotoxia, the base transaction fee would have to be at least 15 Gwei for ETH to switch to genuinely becoming deflationary at the current pre-burn issuance rate. According to Ultra Sound Money, the transaction charge was approximately 10 Gwei as of the time of publication.

Inflation rate still high

According to IntoTheBlock’s Outumuro, the net inflation rate is still “greater than the deflationary ETH many predicted.”  As the overall financial climate has been dealing with excessive market volatility, the price of ether has dropped by around 5% over the past 30 days and was trading slightly above $1,300 on Tuesday. Ironically, upcoming network improvements may cut fees, which could lead to “a bigger and inflated supply,” according to Alexandre Lores, director of blockchain market research at Quantum Economics.

However, Lores added, “I anticipate that long-term network expansion will balance out this aspect, and I am positive about Ethereum as the leading decentralized application layer network worldwide. Of course, switching to a proof-of-stake method for Ethereum has drawbacks. Most notably, there was a chance that the new “staking yields” on the cryptocurrency may cause the U.S. Securities and Exchange Commission to scrutinize it more closely since ether might start to resemble a bond.

Investors’ worries that the SEC would ultimately recognize cryptocurrencies as securities “may still eclipse the newfound inflation-resistance,” according to Conotoxia’s Kostecki. This could have an impact on all projects based on ETH technology. Kostecki noted that despite this, the supporters of Ethereum, lead by Vitalik Buterin, are probably satisfied with the supply rate of the cryptocurrency as indicated by the preliminary data. Kostecki suggested that “investors’ confidence might be rising.”

Maximiliano Stochyk Duarte, head of marketing at ChainPort and cryptocurrency investor since 2014, predicted that if Ethereum experiences deflation, a significant amount of institutional capital may be invested in it over the course of the next few years. Although he continued, “BTC will still be the greatest cryptocurrency for keeping money without the extreme market volatility, I think both ETH and BTC can play together if we desire mainstream adoption.”

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