The crypto industry saw a landmark event as the supply of the second-largest crypto asset, Ethereum, experienced a significant drop of 65,000 ETH at the start of the year, as revealed by IntoTheBlock. Per the report, this comes from the September 2022 Merge that signaled Ethereum’s transition to the proof-of-stake (PoS) consensus algorithm from the proof-of-work (PoW).
Is ETH Deflationary?
Experts noted that the September 2022 Merge created a situation where a fraction of ETH fees were burnt, making the token deflationary. For emphasis, a deflationary currency denotes a token whose supply decreases over a specific period.
This is different from inflationary currency, where the supply of an asset increases for some time. Moreover, deflationary currencies are reportedly attractive in the crypto space as token holders continue to seek scarce digital assets.
In addition, these asset holders believe that the scarcity of a token can drive up its value over time. Another developmental project on the Ethereum network worthy of note is the Shanghai-Capella upgrade, expected to go live on April 12.
More importantly, the most critical aspect of the upcoming upgrade is the Ethereum Improvement Proposal (EIP)-4895. This EIP will integrate validator staking withdrawals into the Ethereum network.
This is another vital feature left out of the September 2023 Merge by the Ethereum development team. Meanwhile, the Shanghai update is expected to enable validators to redeem their staked Ether which was held since the start of the Beacon Chain.
The Ethereum development team is reportedly inching closer to the launch of the Shanghai Capella upgrade on the Sepolia testnet. This testnet is the necessary foundation for the eventual deployment of the mainnet.
What To Expect
At the initial stage, the Shanghai upgrade might cause a significant selloff due to the temporary spike in the price of the available ETH supply. However, this is expected to be a short-term scenario, as revealed by some industry analysts.
Thus, in the medium to long term, price stability will likely follow after the full implementation of the Shanghai-Capella upgrade. Compared to other PoS chains with sets of un-staking times, Ethereum adopts a flexible withdrawal system that depends on the demand to unstake assets at any given time.
According to Dan Smith, a Blockworks Research analyst, the design of the exit queue in the Ethereum ecosystem is to prevent the whole validator network from leaving the platform at the same time. Smith explained that based on their assumptions, the maximum outflow permitted by the protocol would lead to a selling pressure of $95 million a day for the first three days.
Meanwhile, other industry experts like Rich Falk-Wallace, founder of Arcana, believe it will take some time for the number of validators to exit a network in case the outflows occur.
