The beginning of this week marked the culmination of a harsh quarter for Ethereum, with the digital asset’s burn rate, a measure of Ethereum removed from circulation, dwindling to its lowest point since August 2021. This drop-off has been a persistent worry for investors, putting a damper on Ethereum’s market performance, as reported by cryptocurrency market-making firm Wintermute. With an average of 53 Ethereum (ETH) being burned daily last week, the supply of the digital asset has seen a 3% increase since the implementation of the EIP-1559 upgrade, according to data from Ultrasound Money.
This decrease in the burn rate speaks volumes about the shift in Ethereum’s value accumulation since developers turned to layer-2 scaling solutions a year ago. Ethereum’s issuance has been net positive since then, despite some experts opining that trends in institutional adoption might alter this.
Ethereum’s price suffered a significant blow in this first quarter, plummeting by 45% and erasing $170 billion in market value, as per data from crypto data providers CoinGecko and CoinGlass. This downturn marks the third-worst quarter for Ethereum since 2016.
In the early years, Ethereum’s value was driven by user activity, a trend that changed course when Ethereum developers introduced a fee-burning mechanism, EIP-1559, in August 2021. Instead of users paying transaction fees to miners, these fees were burned, thereby reducing the circulating supply of the digital asset.
The transition to a proof-of-stake consensus model in 2022 made miners redundant and cut down the network’s carbon footprint significantly. This, coupled with the subsequent decrease in the issuance of new Ethereum, resulted in a deflationary circulating supply.
However, the dynamics of the market changed with the introduction of EIP-4844, which significantly reduced the amount of Ethereum burned by layer-2 networks. As user activity moved towards these scaling solutions, transaction fees on Ethereum plummeted, recently reaching a five-year low of $0.40.
As Wall Street begins to embrace on-chain activities, analysts posit that Ethereum could return to a deflationary state if institutions bring trillions of dollars of assets with them. The process of representing real-world assets like stocks and bonds on-chain as digital tokens, known as tokenization, could be the game-changer.
Larry Fink, CEO of BlackRock, the world’s largest asset manager, has mentioned tokenization multiple times in a letter to shareholders, stating, “One day, I expect tokenized funds will become as familiar to investors as ETFs. Every stock, every bond, every fund—every asset—can be tokenized.”
Excluding Ethereum’s layer-2 networks, real-world assets worth $5 billion have been tokenized on Ethereum, accounting for 54% of the market, as per data from RWA.xyz. This value could potentially skyrocket to $16 trillion by 2030, as per a Boston Consulting Group paper, but experts’ estimates vary widely.
Bitwise Senior Investment Strategist Juan Leon, however, cautions, “We’re not seeing the economic benefits from tokenization yet. This is going to take longer than people want it to because these large asset managers don’t move very quickly.”
Edited by James Rubin
