Burning Ethereum đĨ
ETH burning controls the supply and demand dynamics of Ethereum. The positive and negative impacts on the network's economics. Can the programmed scarcity really make it ultra sound money? đ
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Summer of 2024, is all about Ethereum and the waiting-in-the-wings approval of Ethereum ETFs in the US.
Do you know that Ethereum is burned to manage the supply of ETH?
Over 4.3 million Ethereum has been burned so far, worth over $12 billion
Why burn Ethereum? Itâs how the ecosystem works.
While the long-term economic impact remains to be seen, burning introduces a fascinating concept of programmed scarcity in the world of cryptocurrency.
Deflationary pressure: Burning ETH reduces the circulating supply, introducing deflationary pressure.
Inflation management: Burning helps mitigate inflation by permanently removing tokens from circulation, promoting a more balanced distribution of ETH over time.
Tokenomics and store value: The deflationary nature of burning ETH can make it a more attractive store of value, key factor within a complex economic system.
Market demand: The market demand for ETH ultimately determines its price. Even with a decrease in supply due to burning, if the overall demand for ETH remains stagnant or declines, the price may not experience a significant increase.
Rate of burning vs existing supply: If the burning rate is minimal compared to the total supply and the rate of new ETH being created through mining, the price impact might be negligible.
Incentivising validators: Network issues new ETH tokens as rewards for validators. Reduction in supply can potentially increasing its value, and incentivise validators to prioritise transactions with higher fees, potentially contributing to faster confirmations.
Fee market predictability: The implementation of EIP-1559 introduces a mechanism for burning a portion of transaction fees, reducing the total ETH supply and improving transaction fee predictability for users.
Long-term sustainability: The burn address contributes to the long-term health and sustainability of the network by ensuring a controlled decrease in circulating ETH, fostering trust, and attracting users and developers to build on the Ethereum.
Practical applications beyond price impact: The burn address serves various practical purposes within the Ethereum ecosystem, including facilitating token migrations, governance proposal incentives, and scaling solutions.
Proof-of-Stake transition: Transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) reduces the rate of new ETH creation through mining. Combined with existing burn mechanisms, leads to a significant decrease in the circulating supply over time.
Future Developments: The community is exploring further burning mechanisms, such as MEV-Burn, which aims to return MEV (Maximal Extractable Value) to ETH holders by burning what is currently being extracted by MEV participants.
Two main categories of Ethereum burning mechanisms
EIP-1559 base fee burning: This is a network-wide mechanism implemented in August 2021.
Transaction fees: Every time a user interacts with the Ethereum network (sending ETH, using a dApp, etc.), they pay a transaction fee, also known as gas fees.
Base fee vs tip: EIP-1559 separates the fee into two parts: a base fee burned by the network and an optional tip for miners.
Burning mechanism: The base fee is dynamically determined by network congestion. This portion is automatically sent to a burn address, effectively removing it from circulation.
Project-specific buyback and burn: This approach is implemented by individual projects built on top of Ethereum.
Project revenue: Some projects generate revenue through various means within their ecosystem (fees, token sales, etc.).
Token buyback: The project uses a portion of this revenue to repurchase its own tokens from the open market.
Burning the tokens: Once repurchased, these tokens are then sent to a burn address, permanently removing them from circulation.
Thereâs also Proof-of-Burn (PoB).
In some blockchains, burning tokens is used as a way to earn the right to create new blocks.
What is EIP-1559?
EIP-1559 is an Ethereum Improvement Proposal (EIP) implemented on August 5, 2021, as part of the London Hard Fork.
EIP-1559 has been designed to improve the scalability and usability of the Ethereum network by reducing congestion and making transaction fees more predictable.
Predictable fee market: The base fee changes by up to 12.5% after blocks are more than 50% full, making the fee market more predictable and less susceptible to congestion-driven price spikes.
Deflationary pressure: The burning of base fees reduces the total supply of Ether (ETH) in circulation, making it more scarce and potentially increasing its value over time.
Improved user experience: The new system eliminates the need for users to bid on gas prices, making transactions more efficient and predictable.
Miner incentives: Miners are incentivised to prioritise transactions with higher tips, ensuring that they receive a fair reward for their work.
What is Ethereum burn address?
This unique address plays a crucial role in managing the overall supply of ETH and potentially influencing its value.
Unique address: It has a specific identifier, commonly represented as 0x0000000000000000000000000000000000000000.
No private key: Unlike regular Ethereum addresses, a burn address doesn't have a private key. This means any tokens sent there are essentially inaccessible and irretrievable.
Burning process: Sending ETH or compatible tokens (like ERC-20 tokens) to this address permanently removes them from circulation, effectively "burning" them.
This process is irreversible, and the tokens cannot be recovered.
Curious about the mysterious place where Ether goes to disappear?
Head to a blockchain explorer: Etherscan is a popular choice, others exist too.
Find the search bar: It's usually prominent near the top or center.
Copy and paste the burn address: Here it is - 0x0000000000000000000000000000000000000000.
Hit search: Etherscan will show you a dedicated page for the burn address.
There are around 13,366  ETH burned as of June 16.
Zero balance: No ETH can ever reside here.
Burn history: A list of transactions where ETH (or compatible tokens) were sent to be burned.
Has Dencun upgrade offset Ethereum burn?
The Ethereum burn rate has been influenced by the Dencun upgrade, but the impact is complex and multifaceted.
Read: Ethereum Turns Inflationary? đ
Reduced gas usage: The Dencun upgrade introduces blobspace, an alternative to the current transactional calldata mechanism. Result in reduced gas usage and a lower amount of ether being burned.
Layer 2 transactions: Layer 2 transactions, which are processed off-chain and then posted to the Ethereum main chain, are expected to use blobspace, leading to lower gas costs. Reduce the amount of ether burned.
Increased transactions: The Dencun upgrade aims to increase the scalability and efficiency of the Ethereum network, which could lead to more transactions and potentially offset the reduced gas usage. Result in a net burn rate similar to the current level.
Long-term impact: While the short-term impact of the Dencun upgrade might be a slight decrease in the burn rate, the long-term effect is expected to be a higher burn rate due to increased network activity and usage of blobspace.
Gas demand: The main driver of gas demand and, subsequently, the burn rate is Layer 1 demand. Even if gas prices settle at lower levels, the increased capacity and efficiency brought by the Dencun upgrade can lead to higher gas usage and a higher burn rate in the long run.
The Dencun upgrade has introduced changes that could reduce the short-term burn rate but may not significantly impact the long-term burn rate.
The overall burn rate is likely to remain relatively stable, influenced by the balance between reduced gas usage and increased network activity.
Risks with ETH burning for the Ethereum ecosystem
Based on the search results, there are several potential risks associated with ETH burning for the Ethereum ecosystem:
Centralisation concerns: While the burn address is decentralised, there are concerns that the rate of burning could be influenced by Ethereum Improvement Proposals (EIPs) and network upgrades.
If control over these mechanisms becomes concentrated in the hands of a few stakeholders, it could raise centralisation concerns within the Ethereum ecosystem.
Balancing decentralisation and efficiency: Finding the right balance between a decentralised governance model and efficient implementation of burning mechanisms is an ongoing challenge that the Ethereum community needs to address.
Overly centralised control of burning could undermine the core principles of decentralisation.
Unpredictable supply dynamics: The future supply of Ethereum is closely linked to both the number of active validators (issuance) and the demand for transaction execution (burn).
Upgrades to the Ethereum network may directly impact the amount of burn or issuance, making it difficult to predict the long-term supply dynamics.
Competition from other layer-1 networks: As decentralised applications (dApps) move and integrate with other blockchain networks, users may be willing to sacrifice the decentralisation and security of the Ethereum base layer for the sake of improved scalability.
This could drive value accrual outside of the Ethereum ecosystem, potentially impacting the demand for ETH and the effectiveness of burning mechanisms.
Regulatory uncertainty: As regulatory frameworks for cryptocurrencies continue to evolve, the impact on burning mechanisms cannot be overlooked.
Potential regulatory changes could introduce new constraints or requirements that affect the implementation and effectiveness of ETH burning.
Reliance on burning for deflationary pressure: The Ethereum ecosystem's reliance on ETH burning to maintain deflationary pressure and influence the price of ETH could be a risk if the burning rate is not sufficient to offset the rate of new ETH issuance.
This could undermine the intended economic benefits of burning.
The future outlook
Ethereum burning is complex.
It has the potential for both positive and negative impacts on the network's economics.
The rate of burning and network upgrades.
Regulatory uncertainty and changes.
Competition from other blockchain ecosystems.
Over-reliance on burning for maintaining deflationary pressure.
Itâs on the Ethereum community to navigate through these dynamics to ensure the long-term sustainability and effectiveness of the burning mechanism.
TTD Week That Was đ
Saturday: Bitcoin đ Nasdaq
Friday: Ethereum ETFs This Summer đ
Thursday: $20T by 2023 đ
Wednesday: June Rollercoaster đĸ
Tuesday: RWA Flavourđģ
Monday: 200M Users. $100B Assets đē
TTD Week in Funding đ°
Nuffle Labs. $13 million. Independent entity for building the layers for data availability, fast finality layer and other products for NEAR modular product suite.
Ava Protocol. $10 million. Intent-based Eigen-layer AVS that enables private autonomous transactions for numerous use cases - DeFi, NFTs, and games.
Symbiotic. $5.8 million. Generalised re-staking system enabling decentralised networks to bootstrap powerful, fully sovereign ecosystems.
Layer3. $5 million. Omni-chain identity and distribution protocol, for crypto consumers to discover new projects, and projects reward their on-chain activity.
Kima Protocol. $5 million. Open protocol for cross-chain and off-chain access to liquidity, data and functionality for decentralised applications.
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