As global financial institutions grapple with record inflation, Ethereum faces a reverse dilemma.
Since Saturday, the ETH supply has fallen by over 4,000 tokens, according to data from ultrasound.money, but then no corresponding price increase. ETH’s price, despite a reduced supply, has fallen around 3.6 per cent in the same period, to $1,307 at the time of writing.
The move marks the first run of deflation – where more ETH is destroyed than created – since the Ethereum network landmark to prove the effort in September.
All Ethereum transactions require so-called gas fees, which increase Ethereum’s security by preventing the network from being overloaded with malicious requests. The greater the traffic on the Ethereum network at any given time, the higher gas fees will rise.
Gas fees are wrapped by the validators that process all ETH transactions. Since the debut of a network upgrade called EP-1559 last Augustbut a portion of each gas fee has also been destroyed, to automate transaction prices and limit the supply of ETH.
Starting Saturday, the cost and volume of gas fees began burning more ETH than was created simultaneously via staking – the post-merger process which ETH is now generated by. Since then, the total amount of ETH in circulation has dropped by 4,001 ETH and counting, and the rate of burn continues to outpace the rate of creation of ETH.
Average online gas charges, meanwhile, have increased 218% since Friday, to a current average of 35 gwei, and shows no sign of letting up.
The source of the erratic increase in Ethereum traffic – and thus the increase in gas fees – that led to ETH’s deflation appears to be a new token project called XEN Crypto. XEN Crypto transactions account for 40% of all gas spent 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 accumulate value “as more and more people join and participate in coining.”
The token, which debuted this weekend, started with no supply but was free to mint (users only had to pay ETH gas fees to generate XEN tokens).
On Sunday morning, the token’s price rose from a fraction of a cent in value to $1.04. Within five minutes, XEN crashed back to just under a cent, before plummeting again to a near-zero fraction of a cent, where the token’s value has since remained.
In the last 24 hours, XEN coins have paid nearly $2 million in gas taxes to generate the novel and now functionally worthless token.
On Twitter, observers soon began labeling the token launch a Ponzi scheme.
XEN’s litepaper specifically criticizes tokens that encourage “pumping and dumping”, and claims that XEN’s tokenomics will solve this problem. Because no pre-existing supply of XEN was initially distributed to the token’s creators, the litepaper claims, it operates on a “fair system.”
Levin, the token’s creator, did not immediately respond Decryptits request for comment.
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