Burning Ether: Quantifying the Ethereum inflation

Burning Ether: Quantifying the Ethereum inflation

Mads Eberhardt

Cryptocurrency Analyst

Summary:  Last week the Ethereum network added a feature to limit inflation by burning a part of the Ether paid in transaction fees. How big is the effect of the burning mechanism? Based on the current data, we estimate that it will reduce inflation by slightly more than a third for the next year.


On Thursday the 5th of August, the London update was implemented on Ethereum, containing several improvements to the network. The most notable improvement was EIP 1559.

In short, EIP 1559 changes the way users pay transaction fees on the network, making the fee sizes more predictable. From being solely based on an auction, the fees are now based on a fixed fee with the option to tip miners. In addition to the fees, the miners are rewarded with newly issued Ethereum, which introduces inflation. But to limit the inflation in the new upgrade, the majority of fees are now getting burned instead of solely being compensated to miners. It essentially means that the more Ethereum is being used, the more Ether is being burned, as usage makes the fees higher.

As the burning mechanism has been live for 8 days, we now have some key figures, making us able to interpret the result so far:

  • In total, 37,000 ETH worth $113,000,000 has been burned. That is an average of around 4,625 ETH per day.
  • At the same time, around 103,130 new ETH has been issued to miners in mining rewards.
  • Simultaneously, around 9,450 new ETH has been issued to stakers in the ETH 2.0 staking contract. These are likely locked for the next year until the merge between the main Ethereum network and ETH 2.0 happens. Thus, they cannot impact the price short-term, but they can long-term.

So the net result is: 103,130 + 9,450 - 37,000 = 75,580 ETH has the total supply increased for this period.

The ether issued in the ETH 2.0 staking contract should not be considered short-term, as it will be locked until somewhat next year. Thus, short-term the supply has been impacted by: 103,130 - 37,000 = 66,130 ETH, still making Ethereum inflationary, but with significantly lower inflation compared to when there was no burning mechanism in place.

Looking a year ahead, it is expected that newly mined Ether accounts for 4.7mn ETH. This would correspond to the inflation if the burning mechanism would not have been implemented. Out of a total supply of around 117mn ETH, inflation without burning Ether would be around 4%.

However, inflation is now highly affected by the two unknowns: The number of transactions carried out and the average fee on Ethereum, thus the amount of Ether burned. This is close to impossible to predict – but for simplicity, let us assume that the burning mechanism will burn the same amount yearly as it has been the past 8 days. This is likely the level to expect. This leaves us with a yearly total burn of between 1.6mn-1.7mn ETH.

As the mining rewards are expected to be constant, the burned Ether should be deducted from the newly mined Ether. Thus, leaving us with a total issuance of new ETH between 3mn – 3.1mn ETH for the next year – without accounting for the Ether being issued to stakers. This will result in an inflation when accounting for burning of Ether of around 2.6%.

Conclusively, this makes Ethereum around slightly more than a third less inflationary short-term compared to before. There is a strong similarity between the Bitcoin halving occurring every fourth year cutting the Bitcoin inflation in half and this burning mechanism update for Ethereum. It has an extensive impact on both blockchains. Similar to Bitcoin, while it has reduced the reward for miners, it has increased the potential economics of Ethereum holders.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.