Ethereum just spiked above $2,100 for the first time since May 2022, thanks to positive changes in ETH supply following the Shapella upgrade.
Ethereum developers succeeded in rolling out the "Shapella" upgrade this past Wednesday - Shapella is a combination of the names of two Ethereum consensus layers: Consensus (Shanghai) and Execution (Capella).
Among other changes, this upgrade means ETH is now staking and rewards from ETH staking can be drawn from smart contracts between ETH stakers, for the first time since staking was enabled. went live on Beacon Chain in December 2020.
Some analysts are worried that allowing ETH withdrawals will lead to short-term selling pressure on the Ether market, as ETH stakers seek to recoup the profits that have accumulated with ETH's price increase since May. December 2020 to present about 200%.
However, on-chain data saw on Thursday the amount of ETH staked spiked to 100,000 ETH, the largest increase in two months. That suggests that instead of a large proportion of investors withdrawing ETH to recoup profits, a larger proportion interpreted the successful implementation of the Shapella upgrade as a signal allowing them to start staking ETH.
As more ETH is staked, this increases the scarcity of unstaken ETH that can be traded on cryptocurrency exchanges. This could increase the price of ETH and it has been shown in the latest fluctuations in the market. The ETH price increase may also be related to the easing of selling pressure from the withdrawal of ETH from staking contracts.
ETH benefits from deflation
With ETH staking withdrawals enabled and ETH staking rewards, we can expect more ETH investors to stake their tokens in staking contracts to take advantage of the yield. Investors in circulating staking protocols (e.g. Lido stETH buyers) can expect yields of around 4-5%, however this number will decrease as the amount of ETH staked increases.
As of Thursday, more than 18.25 million ETH tokens are locked in the staking contract. That number represents just a little more than 15% of the total Ether supply of about 120.4 million. Similar PoS blockchains like Cardano have significantly higher staking participation rates, in the range of 60-70%.
Most experts predict Ether staking participation will increase to this level in the coming years, which could reduce the circulating ETH supply (assuming ETH stakers typically leave their ETH in the contract for long time). This could be said to be a major, almost deflationary headwind for ETH price. And that's before taking into account that ETH supply is actually deflationary.
During August 2021, an update to the Ethereum blockchain introduced a new ETH burn mechanism - essentially, after this date, all ETH paid for transaction fees will be removed from the supply forever. This means that instead of having a steady inflation rate around 4% (this was the annual reward paid to miners when Ethereum was still a proof-of-work blockchain), the inflation rate ETH's generation becomes unpredictable.
However, this inflation rate remains positive until the transition from proof-of-work to proof-of-stake in September 2022. Instead miners are rewarded with about 4% of new tokens each year , ETH stakers currently only receive about 0.55% of new tokens each year. Network activity increased this year, pushing up transaction fees and the ETH burn rate.
And since the ETH issuance rate is now much lower, this means that the net ETH issuance rate has been consistently negative in recent months.
The final drop was around -1.6%, but this number could continue to decrease if network activity and fees increase, which is most likely to happen as the cryptocurrency market grows (which will attract attract more attention and users back to the Ethereum network).
In other words, ETH price is likely to benefit from significant double deflationary dynamics in the coming years as:
More ETH is withdrawn from the supply and put into staking contracts and
ETH supply continues to decrease due to token burning.
Where will the future of ETH price go?
On-chain network usage metrics remain weak despite the recovering cryptocurrency market, with high transaction costs pushing more users to Ethereum-enhanced layer 2 solutions such as Polygon and Arbitrum, as well as Competing chains like Solana.
But the deflationary dynamics of ETH's supply combined with optimism that Ethereum continues to make progress in solving the scalability problem, means that overall, the fundamentals of the Ethereum network will continue to support prices in the future.
With global economic conditions also improving as inflation in the US continues to decline and the risk of recession increases, increasing the possibility that the Fed's interest rate cutting cycle is near, medium and long-term risks are Looks very favorable for ETH's price increase in the coming months.
Technical analysis is also sending positive signals in the short term.
Over the past few weeks, ETH has found strong support at the 21-day moving average, which technical experts see as strong market confidence in short-term price momentum.
All major ETH moving averages are rising in consecutive order. The strong recovery from the 200-day moving average in mid-March and the golden cross (when the 50-day moving average crosses above the 200-day moving average) in early February are also positive medium- and long-term technical signs. term.
With ETH/USD breaking above resistance in the $2,030 area supported by last August's peak and currently at $2,100, a strong bullish price reaction to the psychologically important $3,000 level in the coming weeks is expected. can happen.
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