Ethereum (ETH) is facing a potential scarcity of physical coins as its network becomes deflationary. Despite having a supply of 120 million, the demand for Ethereum is surpassing the available supply. This is primarily due to the need for more coins for staking and security deposits, leaving less ETH available for trading or movement.
Ethereum plays a crucial role in the current DeFi sector and continues to be in high demand despite scalability challenges. The original blockchain is still required and holds even greater value. One of the main factors contributing to the scarcity of ETH is the daily token burns, which increase with more transactions.
In late 2021, Ethereum introduced the Ethereum burn program, particularly during the peak of the NFT and DeFi markets. After the implementation of the EIP-1559 upgrade, Ethereum introduced a new fee and block production schedule, resulting in excess fees being burned. This program gained significant traction, and according to market estimates, the Ethereum network has burned approximately $12 billion worth of coins.
Although end users may still need to pay relatively high fees to move their ETH, block producers will no longer receive the excess funds. Liquid staking platforms, such as Lido and EigenLayer, play a significant role in controlling a large portion of the ETH supply. These platforms allow users to pledge their 32 ETH to secure the network while utilizing the same liquidity in other ecosystems. As a result, more than 44 million ETH are locked for network security.
There is some conflicting information regarding the circulating supply of Ethereum, with reports indicating over 122 million in circulation and the burn tracker suggesting a supply reduction to 115 million. Nevertheless, the network is currently experiencing a slow deflation, addressing the issue of the uncapped supply.
The original plan for Ethereum was to halt production at around 87 million ETH, leading to a mining ice age. However, miners opposed this idea, stating that the fees were insufficient to motivate them. As a result, the Ethereum Foundation decided to continue producing blocks indefinitely through a combination of mining and staking.
Token burns are contributing to the decrease in supply, although they have not yet reached the target of having less than 100 million tokens. Staking and collateralization also contribute to turning ETH into a store of value. Over time, people may hold ETH for its value and only occasionally use it for direct on-chain actions.
While Ethereum gas is not required for scaled transactions on multiple Layer 2 networks, these transactions are still secured through the Ethereum network. The deflationary trend may reverse if fee burning and usage slow down. However, increased Ethereum usage during the bull market has accelerated deflation and potentially boosted the ETH market price.
Despite the high fees and the emergence of multiple Layer 1 networks, Ethereum remains a highly secure network that is preferred by many projects and NFT collections. Migrating to other networks is challenging and time-consuming, leading projects to find workarounds such as L2 solutions, wrapped assets, synthetic tokens, and off-chain computation. However, some tokens are exploring multi-chain solutions and may transfer their activities to new blockchains.
Ethereum continues to be highly useful for decentralized trading, as most prominent decentralized exchanges have an Ethereum version.
There are ongoing discussions and predictions about the long-term price of ETH, with investors eagerly awaiting the return of the bull market in 2024 or 2025. The price target of $10,000 for Ethereum has been a topic of conversation for years. While ETH has traded at four-digit prices, it briefly reached close to $5,000. Following the recent price correction, ETH dipped to $2,910.61 before briefly recovering above $3,300.
