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Jay Crypto

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Last updated Jul 27, 2022 at 6:59 PM

Posted Jul 19, 2022 at 1:00 PM

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With the Ethereum 2.0 hard fork, not only was the Proof of Stake algorithm introduced to Ethereum, but a part of it was being sent to null addresses as a part of an Ethereum burn. How this process is helping the Ethereum price rise or stabilize is pretty interesting.

Ethereum, the price of cryptocurrencies, is the second-largest crypto coin with respect to MarketCap, andin use case and ease of access, it surpasses even Bitcoin. Ethereum Virtual Machine, commonly known as EVM, is massively empowering thousands of tokens, dApps, Web 3.0, and play-to-earn blockchain games. EVM provides the necessary infrastructure for these projects to run smart contracts on virtual compilers in decentralized nodes and then compare the outcomes while using the Ethereum network.

Ethereum is an open-source blockchain tool that features its own coin commonly known as ‘Ether”. Ethereum is trading at $1,145 with a 24-hour trading volume of $16,719,450,970. The current CoinMarketCap ranking of Ethereum is #2, with a market cap of $139,111,606,823. Ethereum has a Fully Diluted Market Cap of $139,111,606,823. It has a circulating supply of 121,426,764 ETH coins; however, there’s no total supply available because Ethereum is a soft-cap asset. Unlike Bitcoin, there’s no limit to the total supply of Ethereum:  so as long as miners are mining, the supply of Ethereum will keep increasing. 

How Ethereum burn is helping?

The price of coins and tokens is based on demand and supply. When more people put their money in a coin the price rises and when they cash out, the reverse happens. The price of a coin is calculated by dividing the MarketCap by the circulating supply.

Price of a coin=MarketCapCirculating Supply

MarketCap is the amount people put in to buy the coin and is inversely proportional to the number of coins circulating. For instance, if the circulating supply of a coin is 1000 and people bought all those coins for $10,000, then according to the formula, the price of each coin will be $10. But if the circulating supply increases, for instance to 10,000 coins, keeping the MarketCap at the same amount, the price of each token will now be only $1. To keep the price the same, it must get new buyers and there must be a MarketCap appreciating in the same way as supply rises.

Applying the same formula to Ethereum gives us the exact price of Ethereum. 

Price of Ethereum=$138,882,794,476121,426,764.31

Solving this gives us the exact price of Ether – $1,144 at the time of writing. If no more coins are added to the already circulating supply, the deflationary nature of Ether will push the price upwards. The problem here is Ethereum will keep adding to its supply with each transaction for eternity. Therefore, to control the increasing number of coins circulating, through an EIP (Ethereum Improvement Proposal), a London Hard Fork was introduced to Ethereum 2.0.

Ethereum 2.0: Burning Ethereum

In the Ethereum 2.0 update, the Ethereum community agreed to cut Ethereum supply to stabilize the price of the assets, as there are more Ethereum already in circulation than Bitcoins will ever be. Over 18,000 Ethereum worth $21 million is burned every week.

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ETH burned since the EIP-1559 launch

Since EIP 1559 implementation, over 2.5 million Ethereum worth $2.88 billion have been burned. These coins were mined then sent to a null address to reduce the circulation supply. If these coins were a part of the current circulation supply, what would the price of each coin be considering the current MarketCap? Let’s quickly find out.

The current supply of Ethereum is 121,426,764.31 and adding 2,514,482 burned Ethereum makes the circulating supply 123,941,246.

Using the same formula for this supply:

Price of Ethereum=$138,882,794,476123,941,246

The price of each Ethereum coin will now be $1120 instead of $1140 – a difference of $20. The above image also shows a ‘Net Reduction’ of 56%. This is how much Ethereum issuance has been reduced since the major EIP launch. This ratio is expected to keep rising and ultimately reach 100%. This will make Ethereum a deflationary asset as there will be more Ethereum burned than issued, making the supply even more scarce and increasing the price further.

This Ethereum burn was also necessary, according to Ethereum developer Tim Beiko, to discourage miners who were spamming the transactions to earn more fees while disturbing the total supply of the coin in an unhealthy way. Ethereum also implemented the Proof of Stake mechanism, instead of Proof of Work, to reduce its carbon footprint.

Environmentalists have major concerns over the carbon footprints of Ethereum and Bitcoin. Though Bitcoiners are avoiding any update to change the code to make Bitcoin a proof of stake asset, Ethereum is already on the green way. Would you let Bitcoin change to Proof of Stake or let it die? 

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