The Ethereum network has entered its most extended period of token deflation since “the Merge.”

A New Ethereum Gas Guzzler

The ETH supply is shrinking again.

Ethereum gas fees spiked over the weekend following the launch of a new token airdrop. The top smart contract network’s users have rushed to mint XEN—the token of a newly launched crypto project—straight to their wallets for free. The catch is that it costs a small amount of gas to do so. 

XEN Crypto deployed its contracts to Ethereum Sunday, marking the launch of the project and the start of token minting. The project is the brainchild of early Google engineer and serial entrepreneur Jack Levin. According to its website, XEN is based on the first principles initiated by Satoshi Nakamoto in the Bitcoin whitepaper. The protocol is permissionless, completely on-chain, and decentralized. There was no pre-mint or token sale, meaning that market forces and the game theory surrounding the project alone will dictate the price of XEN going forward. 

The reason XEN minting is consuming vast amounts of gas on Ethereum is that every address on the network is entitled to mint XEN. The amount of tokens each user receives is based on a complex formula that takes into account the number of people that interacted with the smart contract before them and how long a user is willing to wait to receive their tokens. As more time passes from the launch and more people mint, creating XEN becomes increasingly difficult, with longer wait periods needed to receive the full allocation of tokens. 

The XEN project also makes no effort to prevent users from Sybil attacking, where opportunists make multiple addresses and claim tokens on each one. As there is an incentive to mint XEN early to sell the tokens immediately or receive a larger amount by locking them up, the airdrop has created a “gold rush” scenario where XEN is the gold, and ETH is the pickaxe needed to mine it. 

Ethereum Feels the Burn 

Over the past 24 hours, XEN token minting has consumed 1,470 ETH in gas fees—about 40% of the total gas expenditure on the Ethereum network, per Etherscan data. As a result, the average Ethereum transaction fee has consistently ranged between 15 and 32 gwei, which is enough to push the amount of ETH burned through transactions above that issued to validators on the network. When more ETH is burned than is rewarded to stakers, it causes the total ETH supply to shrink. 

According to ultrasound.money data, the circulating ETH supply has decreased from 120,534,186 to 120,531,045 since XEN Crypto launched. Under the current gas usage, the total Ethereum supply stands to shrink by 0.45% a year, or by around 1.25 million ETH tokens. However, it’s unlikely that XEN minting will be able to maintain this demand for Ethereum use in the long term. As those minting XEN will be aiming to sell their tokens for more than the cost of the gas it took to mint them, higher gas prices disincentivize minting.

Still, as XEN inflation decreases with time and the number of addresses minting, on a long enough time frame, it may become profitable to mint XEN when gas prices are low. The project will likely need to provide use cases for XEN to keep Ethereum users interested and to maintain demand for the token. 

When Ethereum switched to Proof-of-Stake on September 15, it enacted a major ETH supply reduction. Before the Merge, the Ethereum network paid out around 13,000 ETH daily to miners as block rewards for processing transactions and securing the network. Now Ethereum uses Proof-of-Stake, the rewards distributed to validators equal about 1,600 ETH per day—a near 90% drop in emissions. As the base fee for processing Ethereum transactions is burned, the network can become deflationary during periods of high usage. 

Disclosure: At the time of writing this piece, the author owned ETH and several other cryptocurrencies.