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NFT Craze Burns ETH: How NFT Trading is Making Ethereum Deflationary

Is your ETH feeling the heat? It might be because of NFTs! You heard that right. Non-Fungible Tokens, those unique digital collectibles, are playing a significant role in making Ethereum, the world’s second-largest cryptocurrency, deflationary. Let’s dive into how digital art and collectibles are impacting the very fabric of the Ethereum network and its native token, Ether (ETH).

NFTs and Ethereum: A Burning Relationship?

Recent data from ultrasound.money reveals a fascinating trend: NFT trades are responsible for a whopping over 25% of all Ether consumed (burned) in the last week alone. In a market still finding its footing in 2023, this surge in NFT activity is pushing Ethereum back into deflationary territory. But what does “deflationary” even mean in the crypto world, and how are NFTs causing it?

Deflationary Ethereum Explained

Simply put, a deflationary cryptocurrency means that the total supply of the coin is decreasing over time. Think of it like this: more ETH is being removed from circulation (burned) than is being created (coined). Ultrasound.money data confirms this, showing Ethereum’s net issuance, or annualized inflation rate, plummeting to a negative -0.07%. This negative rate signifies that the burn rate of ETH is outstripping its creation rate.

Marcus Sotiriou, a market analyst at digital asset broker GlobalBlock, points directly to the NFT market’s resurgence as the catalyst. The overall positive sentiment in the crypto market is fueling a renewed interest in NFTs, leading to increased sales and, consequently, more ETH being burned.

Breaking Down the ETH Burn: NFTs in the Hot Seat

Let’s look at the numbers. According to ultrasound.money, in the past seven days, approximately 14,700 ETH, worth around $24 million, has been burned. Out of this, a significant portion, roughly 3,400 ETH, was burned directly due to NFT trading activity. And who’s leading the charge in ETH burning? NFT marketplace giant OpenSea is consistently ranked as the top “gas-guzzler” platform, both over the last 7 and 30 days, according to ultrasound.money.

The NFT market’s growth is further substantiated by CryptoSlam statistics. NFT sales volume jumped by over 5% in the last week, reaching $242 million. The Ethereum network dominates this space, accounting for a massive 80% of the total sales volume, translating to roughly $195 million.

“More NFT sales on Ethereum mean more transactions, which means more ETH is burned,” Sotiriou explained to CoinDesk, highlighting the direct correlation between NFT market activity and ETH burn.

The Ethereum Merge and EIP-1559: The Deflationary Duo

To understand why NFTs have this burning effect, we need to look at two key Ethereum mechanisms:

  • The Ethereum Merge: This pivotal upgrade in fall 2022 transitioned Ethereum from a power-hungry Proof-of-Work (PoW) system to a more energy-efficient Proof-of-Stake (PoS) system. While primarily focused on energy efficiency, the Merge also subtly impacted ETH issuance.
  • Ethereum Improvement Proposal (EIP)-1559: Introduced before the Merge, EIP-1559 is the real game-changer in ETH burning. This mechanism dictates that a portion of the fees paid for every transaction on the Ethereum network is “burned” – permanently removed from circulation.

The more activity on the Ethereum blockchain, the more transactions occur, and consequently, the more ETH gets burned due to EIP-1559. This is the fundamental link between increased NFT trading volume and Ethereum becoming deflationary.

The Deflationary Rollercoaster: From FTX to NFTs

Ethereum’s journey to deflationary status hasn’t been a straight line. Remember the crypto market turmoil caused by the FTX exchange collapse in November? During that period of market instability, network usage surged, leading to a spike in ETH burn and briefly pushing ETH into deflation. However, as the market stagnated, network activity cooled down, and ETH became inflationary again.

But now, with the market showing signs of recovery, Ethereum network utilization is picking up once more. Data from Etherscan reveals a clear upward trend in daily ETH burn. For the past six months, the daily burn rate hovered between 1,000 and 2,000 ETH. However, on January 18th, it surged to over 2,700 ETH, demonstrating the recent increase in network activity and burn rate.

ETH Price Reaction

As of Monday press time, ETH was trading at $1,625, marking a nearly 4% increase in the past seven days. While price movements are influenced by numerous factors, the deflationary pressure created by NFT activity and increased ETH burn could be contributing to this positive price action.

Key Takeaways: NFTs and the Future of ETH

  • NFT trading is a significant driver of ETH burn: Currently responsible for over 25% of all ETH burned.
  • EIP-1559 and Network Activity: The more transactions on Ethereum (including NFT trades), the more ETH is burned due to EIP-1559.
  • Deflationary Pressure: Increased NFT activity is contributing to Ethereum becoming deflationary, potentially impacting its long-term value.
  • Market Sentiment Matters: The overall positive crypto market sentiment is fueling both NFT sales and network activity.

The resurgence of NFTs is not just about digital art and collectibles; it’s having a tangible impact on the Ethereum ecosystem, influencing its tokenomics and potentially shaping its future. As the crypto market continues to evolve, the interplay between NFTs and Ethereum’s deflationary nature will be a key trend to watch.

Disclaimer: The information provided is not trading advice, Bitcoinworld.co.in holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.