Shortage of Physical Ethereum Coins Expected as Demand Surpasses Supply
The Ethereum (ETH) network is facing a shortage of physical coins as it becomes deflationary. Despite having a supply of 120 million, the demand for Ethereum is outpacing its availability. The need for more coins for staking and security deposits has resulted in a decrease in the amount of ETH available for trading or free movement.
Ethereum plays a vital role in the current DeFi sector and remains valuable despite its scalability issues. The scarcity of ETH is mainly driven by daily token burns, which increase with more transactions.
In late 2021, Ethereum introduced the Ethereum burn program, which gained momentum during the peak of the NFT and DeFi markets. After the EIP-1559 upgrade, excess fees are now burned, and block producers no longer receive them. This fee burn program has led to the burning of approximately $12 billion worth of coins on the Ethereum network, based on market estimates.
Liquid staking platforms have also contributed to the shortage of ETH. Platforms like Lido and EigenLayer allow users to pledge their 32 ETH to secure the network while utilizing the liquidity in other ecosystems. With more than 44 million ETH locked for network security, liquid staking platforms now control a significant portion of the ETH supply.
There is some conflicting information about the circulating supply of Ethereum, with reports ranging from 115 million to 122 million. Despite this, the network is experiencing a slow deflation, which helps address the issue of the uncapped supply.
The initial plan for Ethereum was to freeze production at around 87 million ETH, but miners rejected this idea due to insufficient fees. Instead, the Ethereum Foundation plans to continue producing blocks indefinitely by combining mining and staking.
While token burns have led to a decrease in the supply of ETH, it has not yet reached the target of having less than 100 million tokens. However, the use of staking and collaterals has turned ETH into a store of value. Over time, people may hold ETH for its value and only use it occasionally for on-chain actions.
Although there are now multiple Layer 2 networks that offer scaled transactions without Ethereum gas fees, they still rely on the security of the Ethereum network.
The deflationary trend may reverse if fee burning and usage slows down. However, increased Ethereum usage during the bull market has contributed to accelerated deflation and may have boosted the ETH market price.
Despite high fees and the emergence of multiple Layer 1 networks, Ethereum remains a highly secure network and the preferred choice for many projects and NFT collections. Migrating to other networks is challenging and time-consuming. Workarounds such as L2 solutions, wrapped assets, synthetic tokens, and off-chain computation are being used to overcome these challenges.
While some tokens may seek multi-chain solutions and transfer their activities to new blockchains, Ethereum still remains highly usable for decentralized trading, with most prominent decentralized exchanges having an Ethereum version.
As the bull market is expected to return in 2024 or 2025, investors are anticipating long-term price predictions for ETH, with some speculating a price target of $10,000. Although ETH has traded at four-digit prices in the past, it has only briefly reached close to $5,000. After the recent price correction, ETH dipped to $2,910.61 before briefly recovering above $3,300.