Ethereum is neither decentralized nor deflationary despite rising prices

Jamal Molla
Written By Jamal Molla
Jamal is an English teacher and freelance writer with a passion for NFTs, metaverse, crypto and technology.

As the backbone of the cryptocurrency industry, Ethereum is inherently defined as a decentralized system. At least, in theory, Ethereum is a decentralized and democratic network built on a deflationary currency. Nothing could be further from the truth, as Ethereum is neither decentralized nor deflationary.

Defying Deflation

Ethereum’s London hard fork in September 2021 introduced EIP-1559, an upgrade that would significantly alter the functioning of the network. With this update, the network could permanently reduce the supply of ETH by burning a percentage of users’ gas prices. It was predicted that the daily rewards granted to miners would eventually outweigh the shrinking ETH supply, making ETH a deflationary currency.

The primary issue preventing the burn rate from surpassing the mint rate is the declining amount of activity on Ethereum. Ethereum would become deflationary if the number of tokens destroyed by gas fees exceeded the number of tokens created for block rewards.

Over the previous twelve months, daily block rewards have averaged 13,000 ETH. Over 13,000 ETH in gas fees would require an average gas price of about 130 gwei on the Ethereum network. However, decentralized apps on Polygon hit 37K as it boasts a 400% increase, attracting many investors.

Since January, however, Ethereum’s average gas price has hovered around 130 gwei. Besides two spikes in May, YCharts data shows that gas prices have stayed below 60 gwei every month since April. The average price has been less than 20 gwei since July started.

Some of the declines in network activity may be related to Ethereum’s soaring price, which continues to contradict market trends. As a result, rising prices are a direct consequence of increasing speculation surrounding the planned merging of Ethereum. As reported by CryptoSlate, open interest in ETH options contracts has surpassed open interest in BTC, indicating more significant speculation in the derivatives market.

Resisting Decentralization

Concerning decentralization, Ethereum’s problems are considerably more alarming. Glassnode reports that those with 100 ETH or more account for almost 85% of the total supply of Ethereum. There is roughly 300,000 ETH available, with a third of that held by entities with more than 100,000 ETH.

New concerns arise in light of Ethereum’s planned transition to a proof-of-stake (PoS) network. A minimum of 32 ETH stake is required to validate transactions on the future PoS network, essentially excluding smaller players from participating in network security. Beacon validators on Ethereum’s Beacon Chain show how the network will change after the merge.

Most Beacon Chain validators are influential organizations, such as reputable cryptocurrency exchanges and promising new staking providers with substantial ETH reserves. The majority of Ethereum’s validators are corporations with headquarters in the United States or the European Union and are, therefore, subject to the laws of those countries.

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