Ethereum Supply Turns Deflationary—But Price Still Struggles

As global financial institutions wrestle with record levels of inflation, Ethereum is facing an inverse dilemma. 

Since Saturday, ETH supply has dropped by over 4,000 tokens, according to data from ultrasound.money, but saw no corresponding price boost. ETH’s price, despite a lowered supply, has fallen some 3.6% in the same period, to $1,307 at writing.                   

The turn marks the first deflationary run—where more ETH is destroyed than created—since the Ethereum network’s landmark move to prove of stake in September.

All Ethereum transactions require so-called gas fees, which increase Ethereum’s security by preventing the network from being overloaded with malicious requests. The greater the traffic on the Ethereum network at a given time, the higher gas fees will soar. 

Gas fees are pocketed by the validators who process all ETH transactions. Since the debut of a network upgrade called EP-1559 last August, however, a portion of every gas fee has also been destroyed, to automate transaction prices and limit the supply of ETH. 

Beginning Saturday, the cost and volume of gas fees started burning more ETH than was being concurrently created via staking—the post-merge process by which ETH is now generated. Since then, the total amount of ETH in circulation has dropped by 4,001 ETH and counting, with the rate of burning still continuing to outpace the rate of ETH creation. 

Average gas fees on the network have meanwhile spiked 218% since Friday, to a current average of 35 gwei, and show no sign of letting up. 

The source of the irregular uptick in Ethereum traffic—and thus spike in gas fees—that prompted ETH’s deflation appears to be a novel token project called XEN Crypto. XEN Crypto transactions account for 40% of all gas used network-wide in the last 24 hours, according to data from etherscan.io. 

XEN, a cryptocurrency created by early Google engineer and crypto influencer Jack Levin, defines itself as a “universal cryptocurrency” with “no intrinsic value” that will accumulate worth “as more and more people join and participate in minting.”

The token, which debuted this weekend, started with no supply, but was free to mint (users only had to pay ETH gas fees to generate XEN tokens). 

On Sunday morning, the token’s price rocketed from a fraction of a cent in value to $1.04. Within five minutes, XEN crashed back down to slightly less than a cent, before plummeting again to a near-zero fraction of a cent, where the token’s value has since remained. 

In the last 24 hours, XEN minters paid almost $2 million in gas fees to generate the novel and now functionally worthless token. 

On Twitter, observers soon began labeling the token launch a Ponzi scheme. 

XEN’s litepaper specifically critiques tokens that encourage “pumping and dumping,” and alleges that XEN’s tokenomics will solve this problem. Because no pre-existing supply of XEN was initially distributed to the token’s creators, the litepaper argues, it operates on a “fair system.”

Levin, the token’s creator, did not immediately respond to Decrypt’s request for comment.