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The Ethereum (ETH) merger event failed to deliver on the much-publicized “spooky” narrative that the world's second-largest cryptocurrency by market capitalization was widely expected to replace Bitcoin after its transition to a Proof-of-Stake (PoS) transaction authentication mechanism. However, now that Ethereum has given up all of its pre-merge hype gains, its current deflationary characteristics, however fleeting, have provided much-needed validation to bulls in the current challenging macroeconomic climate.
As a reminder, the merge event marked Ethereum's transition to a PoS regime in which validators lock up a specific amount of Ethereum in dedicated nodes in order to compete to authenticate transactions and introduce new blocks into the chain.
After Ethereum London Fork, a base fee is determined for a given level of network activity. These base fees are then burned. Therefore, the reward for validators in the post-merger phase mainly consists of two variables: the tipping fee, which is the cost incurred by a user for prioritizing the processing of a particular transaction, and the block subsidy, which is set at 2 ETH. per block and will be distributed equally among all validators. Given the increased network efficiency in the post-merger phase, transaction processing rewards – hence the inflation of cryptocurrency supply – have fallen precipitously.
XEN will go live #ethpow channel today. Note that this is a new experimental chain that is derived from Ethereum and remained the “proof of work”, DYOR to better understand the risk versus reward for your type of engagement…
– XEN Crypto Official (@XEN_Crypto) October 13, 2022
In order to become truly deflationary, Ethereum needs high network activity, which then accelerates base fee consumption. This essential element of network congestion has just been provided by XEN cryptography.
“XEN is an ERC-20 token built on the Ethereum blockchain. It is based on the first principles of cryptography such as decentralization, self-custody, transparency and trust by consensus. The XEN smart contract is immutable, has no admin key, and is open source.
Interestingly, XEN has no supply cap, allowing each user to create as many XEN tokens as they want for free. The only two requirements to create XEN tokens are a metamask wallet and Ethereum to pay the required gas fees. It is this activity that is now increasing network congestion on Ethereum, allowing for an increased burn rate through high base fees.
![Ethereum Burn](https://cdn.wccftech.com/wp-content/uploads/2022/10/Ethereum-Burn.png)
As the excerpt above shows, 16,816 Ethereum coins have been burning over the past 7 days, with XEN Crypto contributing around 26% of this activity.
![Ethereum Supply](https://cdn.wccftech.com/wp-content/uploads/2022/10/Ethereum-Supply.png)
As a result, the total supply of Ethereum has decreased by 0.22% over the past 7 days, with the burn rate outpacing the addition of ETH supply from validator rewards.
So, is this deflationary regime sustainable? Vitalik Buterin claimed in July that the annual issuance of ETH would be equal to 166 times the square root of the number of pieces put into play after the merger. From now on, 14.193 million Ethereum coins were staked on the Beacon Chain. Applying Buterin's calculations, the annual issuance of Ethereum based on the current staking level equates to 625,399.267 ETH or 1,713.42 ETH per day. Now, over the last 7 days, 16,816 ETH has been burned, which equates to a daily burn rate of 2,402.29 ETH. This means that at the current level of network activity, the supply of Ethereum will decrease by a whopping 688.87 ETH per day. But, and this is a major qualifier, the current hype around XEN Crypto will eventually wane, and barring further development, network activity on Ethereum is likely to drop.
Therefore, Ethereum has not yet become sustainably deflationary. However, if its global penetration and use cases increase, Ethereum could very well turn into a permanent deflationary asset in the not too distant future.