Despite The Merge, Ethereum remains inflationary, and the declining NFT interest may be to blame.
In a tweet today, Lucas Outumoro, head of research at IntoTheBlock, highlighted that the declining interest in NFTs might be why EIP-1559 is burning fewer ETH. According to Outumoro, there is a strong 0.58 correlation between NFT volumes and Ethereum burned.
“Why is less ETH being burned?” writes Outumoro. “The declining interest in NFTs is a key factor, with NFT Volumes and ETH burned having a relatively strong 0.58 correlation year-to-date.”
Why is less $ETH being burned?
The declining interest in NFTs is a key factor, with NFT Volumes and ETH burned having a relatively strong 0.58 correlation year-to-date pic.twitter.com/Y7iFP6saN1
— Lucas (@LucasOutumuro) September 30, 2022
It bears mentioning that Ethereum has remained inflationary despite The Merge. Notably, Outumoro had predicted that the network’s net issuance could range within -0.5% to -4.5% depending on gas fees post Merge. However, as Kitco news anchor David Lin pointed out over a week ago, this metric sits at about 0.21%.
Ethereum’s supply cap notably surpassed the predicted figure of 120.6 million to hit over 122 million. While the asset issuance has reduced as promised, from about 13,000 new ETH daily to 1,300, Ethereum is yet to achieve net zero inflation or deflation as promised.
The continued inflation has been attributed to lower gas fees on the network. EIP-1559, Ethereum’s burning mechanism, remains a crucial component of Ethereum’s deflationary plan. It bears mentioning that EIP-1559 burns part of the total Ethereum gas fee, which is not sent to validators and is decided by increased network competition that arises from increased transactions on the network.
So the more transactions on the network, the higher the gas fee and the greater the value of Ethereum burnt by EIP-1559 and vice versa.
Notably, the NFT boom in 2021, mostly minted on the Ethereum network, also saw a corresponding rise in gas fees as it meant more transaction volume. It bears mentioning that the Otherside Otherdeed mint by Yuga Labs in May saw Ethereum fees surge as high as $4,830 due to the network congestion.
However, interest in NFTs has declined steadily in the past 5 months. Dune analytics data shows that monthly trading volumes are 97% lower than peaks formed in January.
Notably, the recent decline can be attributed to worsening macroeconomic conditions that have made investors widely risk off. Notably, enthusiasts hope that Ethereum becoming green, making NFTs environmentally friendly as well, can become the next bullish catalyst for the asset class by attracting new interest from environmentalists opposed to it.
For net zero inflation to be achieved, the Ethereum network has to average gas fees of at least 16 gwei.
Read the last bullet point. Gas is too low at the moment to fill offset issuance.
Once Ethereum averages 16 gwei issuance will be 0% net.
— InsideTheSimulation.eth 🦇🔊💵 (@InsideTheSim) September 20, 2022