Ethereum (ETH), the second-largest cryptocurrency by market capitalization, implemented a token burning mechanism on August 5, 2021, through the Ethereum Improvement Proposal (EIP) 1559 upgrade. Since then, nearly $9 billion worth of tokens have been burned, according to Glassnode.

According to data from ultrasound.money, a total of approximately 2.8 million ETH tokens have been removed from the supply since the burn mechanism was established.

The cumulative value of the ETH supply that has been burned. Source: Glassnode

In the chart above from Glassnode, blue represents the daily ETH supply burned at the spot price, while red represents the cumulative value of ETH burned over time. CryptoSlate’s analysis of Glassnode data shows that Ethereum’s daily burn rate has dropped significantly and almost stagnated since the Terra-Luna crash in May 2022.

During the 2021 bull run, between $20 million and $75 million worth of ETH was destroyed every day. By December 2022, this number had dropped to only about $2 million to $4 million worth of ETH being burned every day. According to ultrasound.money, 1,896.30 ETH was burned in the past day, worth approximately $2.2 million.

It is important to note that the decline in Ethereum’s daily burn rate directly reflects the decline in Ethereum activity during the current bear market.

Understand the significance of ETH destruction

The destruction of a token is when the token is sent to an address from which the token cannot be retrieved. Also known as burning tokens, burning tokens reduces the circulating supply of an asset and shrinks the overall supply over time. The burning mechanism is designed to regulate Ethereum’s gas fees – fees paid to conduct transactions on Ethereum.

Before the burning mechanism, Ethereum users had to guess at the fees they would have to pay to have their transactions included in the blockchain. This results in high volatility in Ethereum gas fees, especially during times of high network congestion.

The Ethereum network adopted a token burning mechanism as millions of users complained about excessive gas fees. According to the EIP 1559 upgrade, users need to pay a basic fee and tip. This amounts to users paying a base fee for delivery and tipping the delivery supervisor for on-time or early delivery. Tips are awarded to miners when the network burns all base fees.

A deeper dive into Glassnode’s daily ETH consumption and gas fee data shows that average gas fees have dropped significantly from around 100 Gwei before EIP 1559 was implemented to around 15-20 Gwei. For example, average gas charges ranged from 100 Gwei to 200 Gwei between January 2021 and April 2021, and spiked above 200 Gwei during periods of network congestion.

In other words, the average gas fee in Ethereum has dropped by about 80% since the implementation of the burning mechanism.

daily supply burning

According to data from Etherscan, the average Ethereum gas fee on December 30 was 20.55 Gwei. Additionally, data from ultrasound.money indicates that the average gas fee for Ethereum over the past 30 days was 16.2 Gwei.

In addition to regulating gas prices, an ETH burning mechanism was introduced to exert deflationary pressure on the token. In other words, the burning mechanism reduces the supply of ETH, which causes the price of ETH to increase over time. This is because the price of any asset is affected by the law of supply and demand, which states that a decrease in supply causes an increase in price.

At the time of writing, Ethereum’s inflation rate, or its net issuance rate, is 0.013% per year, according to ultrasound.money data. If Ethereum had not switched to a proof-of-stake (POS) consensus mechanism, its issuance rate would have been 3.588% per year. With the shift to POS, Ethereum's inflation rate has been much lower than that of Bitcoin (BTC), which issues new coins at a rate of 1.716% per year.

According to ultrasound.money estimates, approximately 1.9 million ETH tokens are expected to be burned annually, while only 622,000 ETH tokens are expected to be issued annually.

Ethereum’s price is currently struggling through the crypto winter – at the time of writing, Ethereum is trading at $1,196.52, down 67.88% for the year. However, with the advent of the token burning mechanism, ETH is expected to enter a deflationary state, which may cause its value to increase in the long run.