Home Ethereum Why Nearly $6 Billion in Ethereum Supply Was Destroyed on Purpose

Why Nearly $6 Billion in Ethereum Supply Was Destroyed on Purpose

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Why Nearly $6 Billion in Ethereum Supply Was Destroyed on Purpose

The network that powers the second most popular cryptocurrency is intentionally destroying some of its own supply.

Since August, Ethereum has reduced 65% of the new issue of its currency, Ether. It is more than the equivalent of 5.8 billion dollars burned, destroyed and removed from circulation, according to Watch the Burn, an Ether data dashboard.

But why destroy all this crypto? Ethereum doesn’t just set fire to a pile of cash and walk away. Reducing the amount of currency available is part of a multi-pronged approach to upgrading the blockchain and reducing the amount of money crypto miners can earn on each transaction.

Last year, the network began implementing Ethereum Improvement Proposal (EIP) 1559. This created a new system in which transaction fees that were previously all paid to miners were divided into base fare and tip to the minor. Now the miner receives the tip, but the base fee is burned or destroyed.

The new system prevents miners from being able to “game the system” with spam transactions, according to Tim Beiko, an Ethereum developer. These spam transactions may increase the minimum charge for everyone else.

“The main reason burning is needed is to prevent minors from playing the system under EIP 1559,” Beiko said. Fortune. “If we didn’t burn some of the transaction fees, they could fill blocks with spammy transactions, increasing the minimum fees for everyone but themselves because they would recoup all the fees.”

It can also keep network transaction fees more consistent, Beiko says. Such charges may sometimes add hundreds of dollars to the cost process Ether transactions, depending on network congestion. This is supposed to improve the Ethereum user experience.

Additionally, the burn ensures that transaction fees are paid in Ether, which “solidifies Ether’s role as the currency of the Ethereum network,” Beiko said. Miners can offer services in other currencies or be offered to pay their users’ transaction fees in other currencies, but on Ethereum, “he has to pay the fees in Ether.”

Burning its currency can also make Ether deflationary in the long run, limiting its supply and making it more valuable. But deflation “is not the goal and is not guaranteed” by the burn, Beiko said.

Even though Ether has already burned a significant amount of its currency, it could destroy even more when the network completes the “merger,” a highly anticipated major upgrade to Ethereum which will move the blockchain from a proof-of-work model to a proof-of-stake.

With proof of work, miners must solve complex puzzles to validate transactions. This process requires a lot of computer power and is often criticized because of its environmental impact. Proof of Stake, on the other hand, allows users to validate transactions based on the number of coins they hold.

The “merge” planned for this summer should reduce the Ether supply.

“After the “merger”, the amount of ETH issued should drop 90%which would lead to similar fee levels to reduce Ether supply by up to 5% per year,” blockchain analytics firm IntoTheBlock said. in its recent newsletter.

Proponents of “merger” have a very optimistic view of the upgrade: $31 billion is already deposited on the proof-of-stake chain.

But in the meantime, NFT trading has been the “biggest ether burner since the introduction of EIP 1559,” IntoTheBlock said, as Ethereum supports more than 80% NFT volume.

Clarification March 21, 2022: This story has been updated to reflect the type of currency that Ethereum has been burning.

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