Little-known crypto makes ETH deflationary — but for how long?

Ethereum network traffic has been up over the last two days, sustaining gas prices above the “ultra-sound” threshold for the first time since last month’s Merge.

However, the increased usage doesn’t look to be the return of a bull market, rather, it appears to be caused by just one token, XEN Crypto, which launched on Saturday.

According to the project’s whitepaper, XEN aims to solve the pump-and-dump problem facing most small-cap coin launches via a free mint system. Anyone can claim a share of tokens by simply paying the necessary gas fee.

Users rushed to mint the token, seeing an opportunity to make a quick profit while XEN’s (rapidly falling) price remains above that of the required gas. At the time of writing, XEN has almost 3,000 holders and accounts for over 60,000 transfers.

And given the low network usage in the depths of a punishing bear market, these users represent a considerable portion of traffic on the blockchain; the XEN token contract accounts for over 40% of gas in the past 24 hours according to on-chain data.

ETH supply has grown by less than 10k since the Merge

All transactions on Ethereum require users to pay gas fees (in ETH), a proportion of which is ‘burned,’ reducing the total supply.

This fraction, known as the base fee, varies according to network traffic. A recent report by crypto exchange Kraken, published just days before the Merge, calculated the threshold at which burned base fees offset ETH emissions in validator rewards:

“We find that a threshold base fee greater than 15.43 gwei is required for ETH to become deflationary post-Merge.”

Since the Merge, Ethereum’s transition to Proof-of-Stake consensus, the rate of supply increase of the network’s native token, ETH, has been dramatically reduced.

Read more: Low usage stops post-merge Ethereum from becoming deflationary

According to ultrasound.money, ETH supply has grown by less than 10k, rather than over 300k under Proof-of-Work, a net reduction of over 95%.

Despite this, low usage has meant that the supply reduction has fallen short of making ETH truly deflationary. The idea of ETH as “ultra sound money” has been one of the Merge’s most hotly-anticipated effects, which Ethereum advocates hoped would haul DeFi out of a bear market.

This weekend, though, marks the first prolonged period in which base fees have remained above the deflationary threshold since the Merge. And, as newly-minted XEN is dumped onto the market, and the price drops below minting costs, this spike in network traffic will likely die away.

David Hoffman of Bankless argues that the current fee model produces “natural interest rates,” potentially leading to increased market stability.

But for now, ETH holders may have to keep waiting for their dreams of “ultra sound money” to become a reality.

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