As global financial institutions grapple with record levels of inflation, Ethereum faces a reverse dilemma.
Since Saturday, ETH supply has fallen by more than 4,000 tokens, according to data from echo.money, but saw no corresponding price increase. ETH’s price, despite a reduced supply, has fallen by about 3.6% in the same period to $1,307 at the time of writing.
The turn marks the first deflationary run – destroying more ETH than creating – since the Ethereum network milestone move to prove the commitment in Sept.
All Ethereum transactions require so-called gas fees, which increase the security of Ethereum by preventing the network from being overloaded with malicious requests. The more traffic on the Ethereum network at any given time, the higher gas rates will rise.
Gas fees are charged by the validators that process all ETH transactions. Since the debut of a network upgrade called EP-1559 last Augusthowever, a portion of each gas fee has also been destroyed, to automate transaction pricing and limit the supply of ETH.
As of Saturday, the cost and volume of gas charges began to burn more ETH than was simultaneously created via staking – the post-merger process thus generating ETH now. Since then, the total amount of ETH in circulation has fallen by 4,001 ETH and it is still being counted, while the rate of burning is still higher than the rate of creation of ETH.
The average gas tariffs on the network are now peaked 218% since Friday to a current average of 35 gwei, and no sign of stopping.
The source of the erratic surge in Ethereum traffic – and thus the spike in gas rates – that caused the deflation of ETH appears to be a new token project called XEN Crypto. XEN Crypto transactions account for 40% of all gas used across the network in the last 24 hours, according to data from etherscan.io.
XEN, a cryptocurrency created by early Google engineer and crypto influencer Jack Levin, defines itself as a “universal cryptocurrency” with “no intrinsic value” that will build value “as more and more people join and participate in the minting”.
The token, which debuted this weekend, started out with no stock but was free to mint (users only had to pay an ETH gas fee to generate XEN tokens).
On Sunday morning, the price of the token shot up from a fraction of a cent to $1.04. Within five minutes, XEN plummeted to just under a cent, before plummeting again to a near-zero fraction of a cent, where the token’s value has remained ever since.
In the last 24 hours, XEN minters paid nearly $2 million in gas costs to generate the novel and now functionally worthless token.
On Twitter, observers soon began calling the token launch a Ponzi scheme.
XEN’s litepaper specifically criticizes tokens that encourage “pump and dump” and claims that XEN’s tokenomics will solve this problem. Because no existing stock of XEN was initially distributed to the makers of the token, the litepaper states, it operates on a “fair system.”
Levin, the creator of the token, did not immediately respond decode‘s request for comment.
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