Ethereum’s Deflation Rate Hits New Yearly Highs – Here’s Where the ETH Price is Headed Next

 The rate at which the supply of ether is shrinking just surpassed its yearly high. The Annualized EIP-1559 Burn Rate on Wednesday exceeded the ETH Issuance Rate by 1.425%, the greatest difference since a glitch in May of last year when the deflation rate briefly exceeded 17%.

Individual ETH tokens are getting scarcer at a faster pace when the deflation rate rises. According to the majority of analysts, this should increase the cryptocurrency's price over time.

The near-5.0% decline in ETH/USD on Friday, as concerns about the cryptocurrency bank Silvergate and allegations that Tether committed fraud in order to maintain access to the international financial system, suggests that traders aren't paying much attention to recent changes in the ETH deflation rate.

In fact, ETH/USD is presently trading at roughly $1,570, down about 10% from its most recent highs in the mid-$1,700 range. While the price of ETH has dropped since the beginning of February, its deflation rate hasn't. In fact, it appears to be heading upward.

Deflation should be considered by traders as a possible talking point or story that could support ETH later this year. If a US recession can be avoided and falling inflation gives the US Federal Reserve room to cut rates, other themes that could benefit from Ethereum network upgrades include the launch of staked ETH withdrawals next month, a potential DeFi resurgence, and a potential improvement in the macro backdrop.

What is Causing Rapid ETH Deflation, exactly?

We first need to understand why ETH deflation even occurs, which necessitates a grasp of the Ethereum network fee structure, before we can respond to the issue of what is causing the increase in the ETH deflation rate. There are two parts to network fees. In order for their transaction to be accepted and executed on the blockchain, all users are required to pay a base fee.

Then, users have the option of leaving a gratuity to expedite the processing of their transaction. The basic fee is automatically calculated by the Ethereum network and increases during periods of high network activity. All of these base fees paid by users must subsequently be burned in accordance with Ethereum Improvement Proposal (EIP) 1559, which was incorporated into the Ethereum code during the London hardfork in August 2021. This will eliminate the tokens from circulation forever.

As a result, when the base gas fee increases, ether is burned at a faster rate. The supply of ETH will decrease once this burn rate surpasses the ETH issuance rate, which is currently about 0.55%. The nodes and stakers who protect the Ethereum network are given ETH. The graph below illustrates how base gas expenses for the Ethereum network have been gradually increasing lately.

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