Ethereum, the second most popular cryptocurrency network, is intentionally destroying a section of its own supply.
It has downgraded the issuance of its cryptocurrency, Ether, by 65% since August 2021. According to Watch the Burn, an ether data dashboard, it is the equivalent of more than $5.8 billion that has been burned, destroyed, and taken out of circulation.
Cutting the amount of available currency is part of a multifaceted strategy to improve the blockchain and reduce the amount of money cryptocurrency miners may make from each transaction.
Block system games
Ethereum Improvement Proposal (EIP) 1559 was implemented by the network in 2021. As a result, transaction fees, previously only paid to miners, have been divided into base and tip fees to the miner. The miner now receives a tip, but the base fee is either burned or destroyed.
According to Tim Biko, Ethereum developer, the burn is required to prevent miners from “manipulating the system” with spam transactions under EIP 1559.
“If we don’t burn some of the transaction fees, they can fill the blocks with spam transactions, raise the minimum fee for everyone, but themselves, because they’ll get the fee back,” he told Fortune.
This can also help keep network transaction fees stable, according to Pico.
Depending on how crowded the network is, these fees can add hundreds of dollars to the cost of carrying out Ether transactions.
Moreover, the burn guarantees that transaction fees will be paid in ether, thus cementing ether’s role as the currency of the ethereum network, according to Bico. Miners can provide services in other currencies or pay in other currencies for their users’ transaction fees, but on Ethereum, fees must be paid in ether.
In the long run, burning ether could cause it to deflate, causing its supply to drop and its value to increase. However, according to Picot, shrinkage is not the goal nor is it guaranteed by combustion.
While Ether has already burned a great deal of its currency, the network “merger,” a highly anticipated big upgrade to Ethereum, that will shift the blockchain from Proof-of-Work to Proof-of-Stake, could destroy even more.
Most cryptocurrencies use one of two basic methods of consensus.
The older of the two is Proof of Work, which is used by Ethereum 1.0, Bitcoin, and many other cryptocurrencies, while Proof of Stake is a modern consensus method that powers Ethereum 2.0, Cardano, Tezos, and other newer cryptocurrencies.
One important difference between the two consensus procedures is energy consumption. PoS allows networks to operate at significantly reduced resource usage because miners do not need to spend electricity on repeating actions while competing to solve the same puzzle.
However, prior to Ethereum’s eventual switch to a Proof of Stock network, the blockchain was merged into the Kiln testnet, with network validators now producing post-merge blocks containing transactions.
According to the newsletter of blockchain analytics firm IntoTheBlock, after the ‘merger’, the amount of ETH issued is expected to drop by 90%, resulting in similar amounts of fees that reduce the supply of Ether by up to 5% annually.