What Happened: According to network data, over 4,418 ETH (equivalent to over $12.1 million) were burned in under 22 hours after the network implemented Ethereum Improvement Proposal (EIP) 1559 as part of the London hard fork.

With EIP-1559, users start paying a variable "base fee" for transactions that — instead of being paid to miners — is burned (read "destroyed forever") in addition to an optional miner tip. But this is far from the only change implemented by this EIP.

EIP-1559 also allows for blocks to vary in size up to double the size that they were before, reducing network strain and nearly doubling the network's throughput in times of need which is in turn expected to result in lower fees when the network sees more use than usual. This, in turn, could result in more Ethereum applications becoming practical and causing more transactions to be processed each day in the long run.

Previously the gas price was determined by — usually automated — guesswork based on the network's strain but now is instead determined by the blockchain itself as the "base gas price" meaning that transactions are less likely to get stuck and everyone needs to pay the same amount, unless they want to pay a miner tip for extra-fast transaction processing.

In the future, Ethereum developers plan to do away with mining altogether and transition the blockchain to the much more energy-efficient proof-of-stake (PoS) algorithm that consumes a fraction of the electricity of mining and does not require specialized hardware that has to be replaced often.

This process is also much cheaper and will allow for the issuance of new coins to be significantly reduced while still subsidizing network maintenance, which is why many hope for Ethereum to become deflationary after it transitions to PoS. This change is expected to take place sometime in Q1 2023, but no official date has been set.

After the transition to PoS, miners would be replaced by stakers who placed their Ether "at stake" and verify transactions knowing that they risk losing their assets if they try to confirm transactions that do not conform to the network's rules. The rate of issuance would largely depend on how much Ether there is at stake: the more coins at stake, the higher the issuance rate.

Now that we all understand the basics of how Ethereum's fees, burning and issuance work we can start looking at estimates of whether and how much we can expect Ether to become deflationary.

Admittedly, we did not try to guess the right number of Ether staked after PoS implementation. Still, this has much less of an impact than base gas price variation, and even triplicating it would not result in the coin avoiding becoming deflationary.

Original publication: August 7, 2021