Is Ethereum Losing Its Deflationary Edge as ETH Burns Vanish?

Ethereum’s daily ETH burn rate, a key feature introduced by the 2021 EIP-1559 update to manage fees and supply, shows signs of declining, based on recent chart analysis highlighted by Miles Deutscher.

The chart shows that Ethereum’s profitability is the lowest it has been in a long time, with ETH burns trending to zero. This implies reduced network usage or fees, which conflicts with Ethereum’s deflationary concept, which relies on burning more ETH than is issued to validators.

The trend has sparked debate within the crypto community: some view it as a temporary lull before a possible recovery, while others express concern about profitability metrics and potential shifts in market sentiment.

Why Are ETH Burns Declining?

There could be several reasons why this is happening, but first, it’s prudent to understand what’s actually going on.

Ethereum’s revenue is primarily driven by network activity, which generates transaction fees. Falling fees point to lower demand for block space, meaning fewer users are willing to pay high gas fees. Lower fee revenue can impact validators and Ethereum stakers, making ETH less attractive as a yield-generating asset.

It’s hard to exactly pinpoint the reasons for Ethereum’s decline, but lower on-chain activity might be one. This means that Ethereum’s DeFi ecosystem has slowed down, with lower trading volumes and fewer transactions on the mainnet. Then, since Ethereum’s burn mechanism is tied to gas fees, lower gas fees equals lower burns. Also, fewer high-fee transactions means less ETH is burned.

All of this is mostly speculation at this point, but it’s worth noting that there doesn’t have to be cause for concern just yet.

What Are the Potential Implications?

It might be still early to predict the outcome of the news, but there are at least a few options that should be noted.

For instance, in the cases when burns outpace issuance, ETH becomes deflationary. A trend towards zero burns raises the possibility of the total ETH supply expanding again, which could impact its perceived long-term value narrative.

Ethereum validators earn from transaction fees and MEV (Maximal Extractable Value). If fees remain low, staking rewards decrease, which would probably discourage participation in Ethereum staking.

We have yet to see what will happen in the end, but if on-chain activity rebounds, either through new innovations, higher DeFi volumes, or something else, Ethereum’s burn rate and profitability could quickly recover.