Long Term Impact of EIP-1559 Simply Explained

How much ETH will be burned in the long run after EIP-1559 finally goes live?


Hey DEFI TIMES community,

Last week, we talked about the possible long and short-term effects of EIP-1559

We said that EIP-1559 will probably cause hype in the short run. But apart from that, it will probably be a non-event.

However, in the long run, it could change the Ethereum ecosystem forever!

After several months or even years, the supply reduction will have lasting effects on the scarcity of ETH. ETH will become deflationary!

It’s very similar to the Bitcoin halving: When did the halving impact the market? Right, only months afterward.

Today, we focus on the long run of EIP-1559!

And it turns out that we have a great simulator by the Ultra Sound Money Twitter account to measure what’s going to happen.

So let’s try out some scenarios and adjust some parameters to find out how much ETH could truly be burned in the future!

But what are the parameters that are important to consider? And with how much weight do they impact the number of burned ETH?

Let’s find out!


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Long Term Impact of EIP-1559 Simply Explained

EIP-1559 is set to launch in a little more than two weeks. What happens afterward is yet a mystery.

But it turns out that we have great models to estimate what is going to happen. One such model is from Ultrasound.money, a well-known Twitter account focused on the meme Ultra Sound Money, which was popularized by Bankless!

This model tries to predict the ETH supply based on the following parameters:

  • Staking Amount: The long-term ETH supply heavily depends on the amount of ETH staked in the validator contracts. After Ethereum successfully switches to Proof-of-Stake, the number of ETH will influence the annual issuance of the currency. That means, with Proof-of-Stake, ETH won’t have a fixed inflation rate anymore. The inflation rate will depend on how many ETH are staked to secure the network. Important: The more ETH are staked, the higher the inflation rate. For example, if only 1,000,000 ETH are staked, the inflation rate will be 0.17%. On the other hand, if 100,000,000 ETH are staked, the inflation will be 1.71%. What’s important to note is that, in both cases, inflation will be lower than today. Proof-of-Stake will significantly lower ETH issuance!

  • Gas Price: This is probably the most crucial parameter influencing the long-term ETH supply. Simply said, the higher the gas price the more ETH will be burned. Why? Because the majority of transaction fees will be burned under EIP-1559. The higher the transaction fee is, the quicker ETH becomes deflationary. That’s why we want fees to be high. We want Ethereum to be used so we can burn as much ETH as possible… ultimately reducing the ETH supply to an absolute minimum. This is music to the ears of every ETH maxi ;)

  • Merge Date: Of course, it also matters when Proof-of-Stake will go live. The inflation rate will significantly decrease after the Merger, which means it’s important to consider the actual date of the Merger. It will make a big difference whether the Merger will happen in January 2022 or January 2023!

With that said, let’s explore some possible scenarios. In the following examples, I will focus on adjusting different average gas prices.

I will assume that the merger will take place in February 2022 because this is the most likely scenario for me. I will also fix the amount of ETH staked to 20 million, which I find reasonable!

Conservative Approach

  • Staking Amount: 20 Million ETH

  • Gas Price: 20 gwei

  • Merge Date: February 2022

Now, let’s take a look at a rather conservative projection of EIP-1559’s impact. I have set the gas price at 20 gwei, which is rather low. To compare, 20 gwei is approximately the average gas price today. As Ethereum isn’t used much today, this is a rather pessimistic approach.

As you can see, with a gas price of 20 gwei, ETH’s supply basically stays the same over time. It’s constant at 119.3 million ETH.

That means at 20 gwei and above… ETH becomes deflationary!

And this is conservative! Let’s see what happens above!

Moderate Approach

  • Staking Amount: 20 Million ETH

  • Gas Price: 50 gwei

  • Merge Date: February 2022

With a gas price of 50 gwei, things start to get interesting. When we reach a long-term gas price of 50 gwei, we start to see noticeable and consistent deflation.

That would mean that 5,000 ETH would be burned per day while only 2,000 ETH are issued! This would imply a net issuance of -3,000 ETH daily!

Per year, a little over 1 million ETH would be burned… gone forever!

Optimistic Approach

  • Staking Amount: 20 Million ETH

  • Gas Price: 100 gwei

  • Merge Date: February 2022

If gas prices tend to go higher and higher, we could enter a true deflationary environment. At an average gas price of 100 gwei, approximately 10,000 ETH would be burned daily, which would lead to a net issuance of -8,000 ETH per day.

Almost 3 million ETH would be burned per year. That’s around 2.5% of Ethereum’s total supply!

Crazy stuff!

Conclusion

After the merge, ETH will most likely become deflationary. Even at 20 gwei, the supply stays constant - and there’s a good chance we will cross this threshold!

What’s pretty cool with EIP-1559 is that high gas prices are going to be a good thing! The higher the gas prices the more scarce ETH becomes. Whenever you hear someone complaining about high gas fees, this person most likely doesn’t hold ETH ;)

Another thing that’s interesting is that ETH will probably never cross the 120 million supply mark.

EIP-1559 makes it possible!


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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.

Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.