Calculation: 1.83 million ETH may be burned in the next year, and the inflation rate will be lower than Bitcoin

Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

Now that we understand the mechanism of EIP-1559, let’s try to estimate the amount of base fee burned in the next year. According to Ethereum core developer Tim Beiko, the base fee is expected to account for 25%-75% of the total transaction fee. According to actual data, since the launch of EIP-1559, the base fee has accounted for about 66.85% of the total transaction fee expenditure. The specific calculation logic is as follows:

Data shows that as of the 13283rd block after the upgrade, a total of 9482.2 ETHs have been burned; in addition, according to Spark Pool statistics, the handling fee accounts for 14.39% of the total mining income in the past 24 hours, and the block reward accounts for 81.3%. From this, it can be calculated that the total handling fee since the upgrade is about 4702.15 (13283*2*0.1439/0.813) ETH. Therefore, the base fee accounts for about 66.85% of the total handling fee expenditure (including the handling fee earned by miners and the burned base fee). This number will fluctuate, but in theory the average should be greater than 50%. Because when the transaction is not active enough, the base fee accounts for a high proportion; and even if the transaction is extremely active, the tip proportion will only increase in a short period of time. As the base fee surges at a rate of 12.5% ​​per block, the total handling fee expenditure will instantly reach a height that ordinary people cannot bear. Referring to the first ten minutes after the launch of EIP-1559, the average block utilization rate exceeded 90%, and the base fee instantly rose from 1 Gwei in the first block to 42.7 Gwei in the 64th block, and then stabilized between 35-55 Gwei.

Let's calculate now, if EIP-1559 was implemented when Ethereum's mainnet was launched in August 2015, how many ETH have been burned so far? Data shows that as of August 6, the historical transaction fees of Ethereum were nearly 4 million ETH. If 66.85% were burned, the total amount of ETH destroyed would have reached 2.674 million. The market value is as high as 8.02 billion US dollars (assuming the price of the currency is $3,000), surpassing ETC and ranking 18th in the total market value of cryptocurrencies.

Looking at the chart above, we can also see that ETH fees have skyrocketed since the second half of 2020, and the daily transaction fee has not been less than 1,000 since May 10, 2020. This is when the DeFi summer began, which exploded user demand for Ethereum and ushered in the era of high Gas. During this period, the total fee was about 3.334 million. If there is a base fee, it means that 2.23 million ETH were destroyed during this period, an average of 1.78 million per year. Of course, the premise of this estimation method is that EIP-1559 cannot reduce the Gas fee, but only make it more stable and predictable.

Let's take a closer look at fees since May 10, 2020, which is an important year because it paints the most accurate picture of block utilization levels and the fees generated as a result. During this period, 2.936 million blocks were generated, with an average fee of 1.13 (ETH) per block. Therefore, if transaction activity remains at this level for the next year and the Gas limit is constant at 15m, an average of 0.89 (1.13*0.6685) ETH can be burned per block. Ethereum has a block time of 13 seconds and an average of about 6,628 blocks per day, so it is expected that 1.83 million ETH will be destroyed in the next year.

In theory, Ethereum issues about 4.84 million ETH per year, which means an increase from 114 million to 119 million in 2021, with an inflation rate of 4.39%. After the launch of EIP-1559, the issuance of ETH will be reduced to 3.01 million, a decrease of 38%, which means that the net inflation rate of ETH is 2.73%. Although deflation has not yet occurred, the supply entering the market has still decreased significantly. Considering that the actual issuance in the first seven months of this year was only 2.24 million, plus the ETH staked in ETH 2.0 and DeFi, the actual inflation rate may be lower than Bitcoin's current 1.77%.