Why ether's supply is growing again and what it means for investors: CNBC Crypto World

Today, Bitcoins in the green to kick off the week. Congressman Patrick McHenry says the bill aimed at creating a regulatory framework for crypto will finally get a vote from the House. And Crypto Quants head of research, explains why the den Coon upgrade has made ETH inflationary once again. Welcome to CNBC's Crypto world. I'm Brandon Gomez, Crypto prices moving higher to start the week, with Bitcoin rising more than 2 1/2% to nearly $63,000 by noon. Eastern Ether also climbed higher, trading just under $3000. And Solana jumped nearly 1 1/2% to 147 bucks. OK, let's talk about the top stories. The SEC has opposed Coinbase's attempt to get an appeals court to intervene in the exchanges dispute with the regulator. In this filing from Friday, the agency said the court should not grant the Crypto Exchanges request to review how or if conventional securities rules apply to crypto. The SEC argued in the filing that Coinbase was trying to create a new legal test for how crypto might fit into existing securities precedent, which a District Court had already rejected. Coinbase's chief legal officer, Paul Grewal responded to the development on X on Friday evening, arguing that the SEC contradicted its own arguments for the same kind of appeal in the Ripple case. Last month, Coinbase filed what's called an interlocutory appeal in Federal Court, asking a higher court to review whether a crypto transaction that poses no obligation to the original issuer of the asset should be deemed an investment contract that would be regulated by the SEC. The judge overseeing the SE CS case against Coinbase will have to rule on the motion, and if she sides with the crypto exchange, Coinbase will be able to send the motion to the actual appeals court. Next, pro crypto Congressman Patrick McHenry says the bill aimed at creating a regulatory regime for US crypto markets will finally get a vote from the House of Representatives later this month. In a statement posted to X on Friday, McHenry, who is the chairman of the Financial Services Committee, said the House will consider the Financial Innovation and Technology for the 21st Century Act, which will deliver, quote, robust consumer protections and regulatory clarity for digital asset markets. The bill was cleared last summer in both his committee and the House Agriculture Committee. McHenry called the legislation much needed, adding that he looks forward to taking a quote monumental step to finally deliver the transparency, accountability, and consumer protections that the digital asset ecosystem desperately needs. Last a Crypto non Profit launched a political action committee to raise money from its 480,000 members For crypto friendly politicians, Stan With Crypto's PAC is also endorsing A bipartisan roster of candidates running in the House and the Senate. The PAC joins a deep pocketed effort from the crypto industry to put political candidates in office who are committed to supporting digital assets in blockchain technology. Warders reports that Crypto Super PAC's Fair Shake, Defend American Jobs and Protect Progress have so far raised more than $110 million this election cycle, according to Reuters. PAC's like Stand With Crypto are typically set up to gather funds for candidates or political causes and are different than super PAC's, which can receive donations of unlimited size but cannot coordinate with campaigns directly. Endorsements include Jim Banks, a Republican running for Senate in Indiana, Jim Justice, a Republican running for Senate in West Virginia, among others. As of this morning, Stand With Crypto's website says that more than $86 million has been donated by crypto advocates. All right, let's talk about ETH for our main story, and specifically ETH's burn rate. As a refresher, networks like Ethereum burn a cryptocurrency by taking it out of circulation. The goal is to reduce supply and cut down on inflation. But Julio Moreno, head of research at Crypto Quant, points out the burn rate of ETH has been declining and he says the asset looks to be inflationary once again. So Crypto World's Tanaya Mckeel spoke to Moreno about ether's inflationary shift and why he points to the den Coon upgrade back in March as the culprit. You did this research that showed that the supply of ETH issuance is growing at the fastest rate since the merge. So that was as a reminder that was Ethereum's technical transition in September 2022 from proof of work to proof of stake and that made its infrastructure more energy efficient and that was supposed to help lower the rate of ETH issuance. But now you've got this research out showing that issuance is on the up and up. Can you break this down a little bit more for us to start? When did this trend begin and how did we get here? Yeah, it began after the latest upgrade for Etherium which was the the Denkin upgrade on March 12th. And this upgrade mostly was make transactions more efficient and and the data storage more efficient for Etherium so that they could have like lower lower transaction fees, right. So the transaction fees did decline a lot but this made you know total transactions on on the network transaction fees decline, right. And so there's now less amount of of Ethereum being burned through transactions right before they they they burned transactions, right, transaction fees get burned and when this this transaction fees were high, it overtook the the issuance of Ethereum making the the net supply negative right and the growth of of supply negative. So after this upgrade with lower transactions even even accounting for higher network activity, less transactions get burned, right. And so this has a result of of increasing again the the need net issuance of Ethereum. And so that's what we have been seeing since a little bit after the the this upgrade then can upgrade. OK. And let me pause here. Can you just to recap, what is the importance of the burn function on the Ethereum network? Yeah, so over the years, Ethereum has experienced this protocol upgrades that have had some effects on its monetary policy, right? So at some point they wanted to compete with Bitcoin in terms of the monetary policy, right. So Bitcoin has a you know a fixed inflation that gets halt every every four years, right. So they wanted to to compete on that and that from for for with Bitcoin. So one of the upgrades the London upgrade was introducing the, the burnt, the burnt fees, right. And so that's what that what caused like all the part of the transaction fees to to being burned for Etherium. So that's important in, in the sense that it those fees you know that that amount of Etherium just just it gets you know erased from from from existence right. So that has the effect of lowering the the, the total supply of Etherium if, if, if it, if they are big enough, right. So and that had been happening you know since the merge that had been happening, but with this latest upgrade that is not the case anymore, right. So if it even became inflationary again and so some of the, you know, I would say like the more relevant thing that we talked about in this report is that this decrease in in transaction fees and and the transaction that could burn, it's a structural shift. It's not just because you know there's less activity and then there's less transaction fees. Right now. It's not that the activity has remained really high on Ethereum, but because after the sub upgrade now that activity doesn't impact fees like it did before, right. And so we have lower fees and then net issuance is now positive because of that because less fees are getting burned. You've said this is a structural change and that activity hasn't fallen on the Ethereum network. So can you expand a little bit on, on on structural and you know how long you expect this trend to last and how serious it could be for investors? Yeah, yeah. So before this operate, if you see network activity on Ethereum like for example, total number of transactions increase right, spike, then you have the corresponding effect on fees, like fees also spiked, right. This was before this latest upgrade, so, so the amount of fees being burned also spiked, right? But after this you see high activity. We we still have high activity on the network, but we don't have that corresponding spike on fees, right? And so what's the effect on that is that less fees are getting burned and so as a consequence the, the supply is now increasing again. Now when I say that this is structurally what I mean is on in the past you, you see a correlation between activity and and fees, right. And so it was normal that if at some point activity decrease then fees also decrease. So you could say like OK, so maybe it fees decrease now because there's less activity, no, it's not the case, right. That's the structural shift that we see that there is no corresponding you know lower fees, lower activity or higher fees higher activity, right. No, we have high activity but the fees don't spike, don't increase and so that because that relationship has has shift you know has may be broken then the the the new issuance of Etherium is increasing again. So and that could last up until we maybe need you know much, much higher activity now to see the the decrease in supply of feed that we have seen before. What is the potential impact to the price of ether itself? If there is a potential impact, how long do you expect that to see, How long until you expect to see that take effect? And then what about, you know, related coins within the that are related or within the Ethereum universe? Yeah, so I think we could ask ourselves like what does this mean for investors, right. So I I see these two thesis for Ethereum. So one is you know if investors were thinking to get exposure to Aetherium based on on the thesis that you know it was getting more scarce, there was less supply right. So I think this after this this thesis is not valid anymore right. So if you were, you know, thinking about getting exposure to to a theorem based on this thesis, then you should think again, right? Because this really changed the this, this you know the structure of of fees and the structure of the new issuance of of the theorem and the the growth of supply. Now if you are looking to get exposure to a theorem under the thesis that theorems are growing, scalable and cheap, cheap transaction network to build the five applications, you know, I think this thesis is supported, you know, by by this upgrade, right, Because it indeed made Ethereum, you know, cheaper, it made it more scalable, right. So I think it depends on the thesis that you have as an as an investor and and of course being aware of this structural shift in the supply of Ethereum. OK, that's all for crypto world today. We'll be back here again tomorrow and we'll see you then.

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