Ethereum’s supply is shrinking again. Here is why

XEN Crypto rolled out its contracts on Ethereum on Sunday, marking the launch of the project and the start of token minting. The project is the brainchild of former Google engineer and serial entrepreneur Jack Levin. According to his website, XEN is based on the first principles initiated by Satoshi Nakamoto in the Bitcoin white paper. The protocol is permissionless, entirely on-chain and decentralized. There has been no pre-currency or token sales, which means that market forces and the game theory surrounding the project will alone dictate the price of XEN in the future.

The reason why minting XEN consumes large amounts of gas on Ethereum is because 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 how many people have interacted with the smart contract before it and how long the user is willing to wait to receive their tokens. As time passes since launch and the number of people who coin increases, the creation of XEN becomes more difficult, with longer waiting periods to receive the full amount of tokens.

The XEN project also makes no effort to prevent users from launching Sybil-like attacks, where opportunists create multiple addresses and demand tokens for each. Since there is an incentive to hit XEN early to sell the tokens immediately or receive a larger amount by blocking them, the airdrop created a “gold rush” where XENs are the gold, and ETH the pickaxe needed to extract it.

Ethereum feels the burn

Over the past 24 hours, XEN token mining has consumed 1,470 ETH in gas fees, or about 40% of the total gas spend on the Ethereum network, according to Etherscan data. As a result, Ethereum’s average transaction fee has always been between 15 and 32 gwei, which is enough to push the amount of ETH burned by transactions above that delivered to validators on the network. When the amount of ETH burned is greater than that rewarded to stakers, the total supply of ETH shrinks.

The supply of ETH in circulation has decreased from 120,534,186 to 120,531,045 since the launch of XEN Crypto. Under current gas usage, the total Ethereum supply is likely to decrease by 0.45% per year, or about 1.25 million ETH tokens. However, it is unlikely that XEN minting will be able to sustain this demand for Ethereum use over the long term. Since those minting XEN will be looking to sell their tokens at a price higher than the cost of the gas needed to mint them, rising gas prices discourage minting.

Nevertheless, as XEN inflation decreases with time and the number of addresses that mint them, over a sufficiently long period of time, it may become profitable to mint XENs when the price of gas is low. The project will likely need to provide use cases for XEN to maintain Ethereum user interest and demand for the token.

When Ethereum moved to Proof-of-Stake on September 15, it resulted in a significant reduction in ETH supply. Before the merger, the Ethereum network was paying out about 13,000 ETH per day to miners as block rewards for processing transactions and securing the network. Now that Ethereum is using Proof-of-Stake, the rewards distributed to validators are equivalent to about 1,600 ETH per day – a drop of nearly 90 percent in issuance. As the base fee for processing Ethereum transactions is burned, the network can become deflationary during periods of high usage.