Citi Reports The Possibility of Ether (ETH) Moving Towards a Deflationary Future
Citi said in a research report Monday the change in net issuance of ether (ETH) too close to zero was the most significant impact of the Ethereum blockchain’s transition to proof-of-stake (PoS) or also known as the Merge.
The Merge Stop The Issuance
The report said prior to the Merge, issuance was stable at 2 ETH per block, resulting in annual inflation of supply of 4.2%.
After the Merge, proof-of-work (PoW) issuance ceased, and staking yields were introduced, which were partly offset by burning or taking the fees out of circulation.
A PoW consensus mechanism was replaced by a more energy-efficient PoS consensus mechanism as part of the Merge, which was the first of five upgrades planned for the blockchain.
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Joseph Ayoub, an analyst wrote, “Ether looks like it could be moving towards a deflationary future as it exhibits periods of deflation amidst low network activity.”
As activity rises, it could maintain a deflationary supply since it already showed deflationary tendencies post-merger.
Ether Price
According to Citi, the switch to PoS, has removed about 564,000 Ether (ETH) from circulation over the past six weeks as compared to when PoW was still being issued or around $870 million in terms of U.S dollar.
As a result of the switch to PoS, there has been a reduction in active ETH supply of about $7.7 billion annually.
There are indications that derivatives markets are driving recent changes in the price of ether.
The cryptocurrency’s open interest has reached its highest level since April, when the price was around $3,000.
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“This marks one of the largest divergences between price and open interest over the last [three] years,” as well as indicates further volatility is likely, cited the note.
As a result, the bank says there is a great deal of leverage in the derivatives market, which might be causing, “the tail wagging the ‘spot-price’ dog.” Following the success of the Merge upgrade, Ether 30-day historical volatility reached record lows, but is rising after the cryptocurrency broke free from its recent trading range, the bank said.
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