Ethereum Drops 7% Despite Going Deflationary

After the Merge, Ethereum did not receive much of a popularity boost, despite the radical change in terms of transaction validation and consensus mechanism. One of the updates saw Ethereum’s network becoming deflationary over the past week, dropping by more than 5,500 ETH.

Ethereum seems to have increased its on-chain activity over the past seven days, while the number of ETH tokens going into the burning mechanism exceeded the number of new tokens being released. The move is a first after the infamous Proof-of-Stake (PoS) migration, called the Merge.

Ethereum is down, but on-chain activity surges

One of the biggest reasons for the on-chain activity surge is that ETH users are rushing to interact and mint XEN tokens, a recently launched project launched by the “Fair Crypto Foundation.” The project gives out free tokens for minting, but users have to pay the gas fee for the transaction. Furthermore, if users decide to stake the XEN tokens, they can earn an APY of 20%. However, from the 582,000 wallet addresses that successfully minted XEN tokens, only a thousand staked them.

Before the network update, Ethereum’s network rewarded ETH miners with 13,000 ETH daily and gave close to 1,600 ETH daily to network validators on the Beacon Chain. The Merge, however, caused a massive supply shock due to not needing miners to validate transactions, thus rewarding them, which caused a 98% drop in Ethereum issuance post-Merge.

An overall crypto market downturn

Ethereum failed to grab onto the update popularity surge and has been in a downtrend ever since the network successfully finished its much-anticipated upgrade. Indeed, Ethereum is down by more than 22% since the Merge, so the deflationary pressure seems to be inefficient in reverting the trend.

However, Ethereum’s price trend corresponds to wider market trends, with Bitcoin falling below $19,000 before bouncing back up. There are only a few cryptos that did not record a weekly price decrease, with Ripple (XRP) being the only one in the green in the top 10.

Is volatility incoming after record short position orders?

Meanwhile, data from Santiment suggest that the majority of crypto speculators are waiting for Ethereum and Bitcoin to collapse, as investors are putting more and more short orders, which bet that the prices of the leading cryptos would plummet.

The primary reason behind the massive short order spike is inflation figures that exceeded expectations. However, the increase in shorts, combined with the latest U.S. Consumer Price Index (CPI) statistics announcement, stressed the top crypto enough to fall below $19,000, but the almost immediate bounce back close to $20,000 also sparked a wave of short position liquidations. It turns out that over 136,000 investors lost more than $300 million in futures contracts liquidations with 88.76% of futures liquidations have been from short traders.

Santiment’s analysis also noted that the bounce was the "crowd's least expectation", which could be a stepping stone for massive volatility, combined with the pressure from a likely interest rate hike from the Fed's Federal Open Market Committee (FOMC).