Ethereum’s token ETH is turning deflationary after more tokens are burned than new ones are issued. This has led to some people asking if Ethereum is ultra sound money. Ultra sound money is one where there is a decline in its supply, which leads to its value increasing as demand remains the same or increases.
The latest deflationary turn for this digital currency came during the latest cryptocurrency crash as the number of transactions and subsequent transaction fees spiked. This happened as more people sent tokens from one exchange to another or as they swapped cryptocurrencies.
As many Ethereum enthusiasts know, the network introduced a new burning mechanism during the EIP-1559 upgrade of August 2021. This new burning mechanism burns a percentage of transaction fees, making ETH deflationary. The increase in transaction fees and swaps means that a lot of Ethereum was burned during this latest crash.
The supply of ETH has been falling since early October 2021 and has continued to fall at an accelerated pace. One thing worth noting is that the decline in supply and the burn happened as the price of ETH and other cryptocurrencies was falling.
The good news for investors and ETH holders is the price has since stabilised as you can see from the cryptocurrency historical price graph at https://www.okx.com/markets/prices/ethereum-eth where you can see the trending prices as far as five years back.
The idea of Ethereum being ultra sound money was born in March 2021 during an interview on the state of Ethereum and cryptocurrencies. The idea stems from a comparison between the supply of gold and Ethereum.
Capping the supply of gold stabilises the market and increases its value. While this doesn’t happen with Ethereum, the amount of the digital currency in the market remains stable through its burning mechanism.
However, some are not convinced of this and think that Bitcoin is the ultra sound digital currency. They tout its predictable and unchangeable supply as what makes it ultra sound money. This cannot be said of Ethereum, as its supply is not fixed.
Ethereum remains a favourite among investors and traders, especially those who invest in cryptocurrencies due to their utility. Ethereum remains the leading crypto asset for building decentralised applications and smart contracts. It also has other real-world utility that means it will continue to be in high demand for a long time.
Additionally, its recent merger gave it additional utility and allows it to be used for much more than it has in the past.
Because ETH is burnt when it is transacted, there is a fear that transactions will slow, especially as the wealthy buy more Ethereum. They will then hold and not transact anymore, which will keep the amount of ETH the same but with reduced transactions.
There is a lot to consider when deciding whether Ethereum is the future of money. However, its utility and deflationary nature are both sound arguments in its favor.