how is ethereum burned

EIP-1559 revolutionized Ethereum's transaction fee mechanism by introducing a "burn" feature, reducing the supply of ETH and stabilizing transaction fees during high network congestion.

Oct 20, 2024 at 04:05 pm

How is Ethereum Burned?

Ethereum, the second-largest blockchain by market capitalization, has implemented a mechanism called "burning" as part of its overall roadmap. Burning refers to the intentional destruction of a certain amount of ETH (Ethereum tokens) by sending them to an inaccessible address, effectively removing them from circulation.

Methods of Ethereum Burning:

1. EIP-1559:

   • Implemented in August 2021, EIP-1559 introduced a new transaction fee mechanism.
   • A portion of transaction fees (base fee) is burned, reducing the supply of ETH.
   • The amount of ETH burned is determined by network congestion, making burning more prevalent during busy periods.

2. EIP-3675 (Burn On Token Transfer):

   • Proposed in February 2022, this EIP aims to burn a small amount of ETH (token burn rate) when tokens are transferred.
   • If implemented, it would increase ETH's scarcity and potentially reduce transaction fees.

3. ERC-20 Token Burns:

   • Developers of ERC-20 tokens can implement a burn function in their smart contracts.
   • By calling this function, a certain amount of tokens is sent to an inaccessible burn address, reducing the token's supply.

4. Community Burning Initiatives:

   • Individuals or organizations can voluntarily burn ETH to support the network and enhance its value.
   • Binance, a major cryptocurrency exchange, has conducted regular ETH burn events in recent years.

Impact of Ethereum Burning:

• Reduced Supply: Burning ETH reduces the total supply, increasing the scarcity of the token and potentially leading to higher prices.
• Deflationary Effect: The reduction in ETH supply may result in a deflationary environment, where the value of existing ETH increases.
• Stabilization of Transaction Fees: EIP-1559 has helped stabilize transaction fees, as during high network congestion, more ETH is burned, leading to lower fees.
• Increased Network Security: ETH burning strengthens the network by reducing the incentive for malicious actors to engage in hacking or other attacks.

Current ETH Burn Rate:

The daily ETH burn rate varies depending on network activity. According to Ultrasound.Money, the estimated ETH burn data for 2023 is as follows:

• January: 6,972 ETH burned per day
• February: 8,207 ETH burned per day
• March: 6,695 ETH burned per day (estimated)

Conclusion:

Ethereum burning is a significant mechanism that has been implemented to enhance the stability, security, and value of the Ethereum network. Through various methods such as EIP-1559, ERC-20 token burns, and community burn initiatives, ETH is being removed from circulation, creating a potential deflationary environment and supporting the long-term growth of the Ethereum ecosystem.