What Makes Ethereum Deflationary?
There’s been a lot of talk about Ethereum “going deflationary” recently. However, while this is generating a fair amount of excitement, many crypto investors and miners are confused about what it actually means for them and their coin. We take a look at what it means for something to be deflationary, why Ethereum is considered deflationary, and what it means for your coin stock.
What Is Deflation?
We all know that inflation means that the price of something increases over time. But it’s a lot less common to hear that something is deflationary – after all, modern life tends to get more expensive!
However, that’s exactly what deflation is – when the overall price of something drops so much that it starts to become less expensive. Deflation is usually the result of large-scale economic changes, but in the case of Ethereum, it’s specific to this type of cryptocurrency.
Why Has Ethereum “Gone Deflationary?”
Cryptocurrencies like Bitcoin and Ethereum have increased dramatically in value over the last few years. So much so that it’s turned some early miners and investors into millionaires almost overnight.
However, since the introduction of EIP 1559, it’s actually become more expensive to mine Ethereum. This new, flat rate mining cost is based on a complex algorithm, and because it has generated several blocks of Ethereum that have had a lower value because of EIP 1559 fees, it’s starting to drive the value of the coin down overall.
EIP 1559 is linked to the traffic on the network, and since crypto is so popular right now, there’s no sign of traffic slowing down. So, the cost to mine coin is up, and the net value of the coin is down – resulting in deflation of the coin.
What Do Flat Fees Mean?
The biggest change that EIP 1559 has brought to Ethereum is the cost per block. In the past, miners were able to bid to get their blocks mined. The highest bid won, and that block was processed first. EIP 1559 sets a fixed rate for mining, to which a tip can be added as an incentive for priority processing. This makes the process more transparent and predictable, but it does increase the cost per block.
What Does This Mean for Crypto Investors?
Any big change in the crypto world is the subject of controversy, because this is all relatively new territory. Some investment experts are saying that the hundreds of deflationary blocks of Ethereum produced recently will cause the whole currency to become deflationary.
Others say that because the deflationary trend only applies to some blocks, the resulting price drop will actually make the currency more attractive, and the demand will make it inflationary instead.
Some say that the additional cost to launder deflationary Ethereum blocks will deter hackers, making the currency more secure.
Right now, it all seems to be a little bit up in the air, but there’s no doubt that these recent changes will have crypto investors looking closely at Bitcoin’s biggest competition. Which in itself may affect the value and demand for the coin.