Kraken Intelligence released an on-chain study that showed strong accumulation behavior by Ethereum miners, even though they were facing lower revenue after a major network upgrade.
After the activation of the London Hard Fork, Ethereum miners had accumulated 2 million Ether (ETH), worth $6.1 billion. Miners’ net Ether holdings reached an all-time high at 22.3 million ETH, which is nearly 19% of total Ether supply.
According to the Kraken report, “ETH accumulation was slow for most of the summer and then picked up speed in July despite ETH price trending lower.”
“ETH accumulation among miners took off after EIP-1559, as they probably saw the disinflationary effect of the upgrade to drive up the price.”
Supply of Ethereum miners. Source: Kraken Intelligence, Coin Metrics
Miners ignore EIP-1559 FUD
EIP-1559 was launched alongside the London Hard Fork in August. It divided transaction fees (chargeable via native token Ethereum) into two parts: Base fee and Priority fee.
To add transactions to Ethereum blocks, the network began charging base fees. It also introduced priority fees, or voluntary tips, that Ethereum users pay to miners in order to speed up transactions.
EIP-1559 introduced a fee-burning mechanism to change the way Ethereum’s token currency works. The improvement proposal began to burn the base fee, making ETH a deflationary asset. It permanently removed a portion of its supply from circulation.
A drop in revenue would also result from Ethereum miners burning a portion of the total fee collection. EIP-1559’s launch raised concerns about mining profitability. One study found that miners’ revenues dropped 15% immediately after EIP-1559 was launched.
However, this didn’t stop miners from increasing their exposure to the Ethereum market. ETH’s hashrate reached a record high at 736.67 terrahash per second (TH/s), on Sept. 23.
The Ethereum network has seen a significant improvement in performance over the past 12 months. Source: YCharts
This is despite the fact that Ethereum mining activity dropped following China’s crypto crackdown. In May, this led to the hash rate dropping to 477.54 TH/s. Kraken wrote:
“This shows us that the China crackdown was exaggerated and that miners view the latest upgrade for ETH as a boon that outweighs the con of the miner reward reduction.”
NFT boom and staking sentiment behind mining boom
The EIP-1559 FUD was survived by Ethereum miners mainly due to rising Ethereum prices and high network demand fueled by a boom of nonfungible tokens (NFT).
Kraken pointed out that miner revenue reached $70 million, a nearly four-month high, on Sept. 7. This was 27% more than a month after Aug. 5, when “NFT activity” in projects like PALS, Loot and Junkies likely drove priority fees higher.
Revenue from Ethereum mining. Source: Kraken Intelligence, Coin Metrics
However, the recent slump in NFT sector revenue was exacerbated by strong corrections in its daily active users (-23%), trading volumes (83%), and transaction counts (-31%).
Nevertheless, miners’ ETH holdings rose to their highest levels to date. Kraken was able to deduce that miners were accumulating and mining Ether to become validators for the upcoming Ethereum proof of stake chain, dubbed Ethereum 2.0.
To become validators on the Ethereum 2.0 network, users must stake 32 Ethereum into Ethereum 2.0 smart contract. They may then earn up to a 5% annual rate. According to CryptoQuant data, ETH 2.0 had attracted 7.813 billion ETH from 48,780 unique depositors. This amount was worth $2.85 Billion.
Related: Ethereum balance on crypto-exchanges hits new lows, as ETH price retakes 3K
Despite the fact that Ether tokens are becoming less active due to staking or EIP-1559 activation more miners might find it profitable to hold ETH due to the classic supply-demand model.
EIP 1559 #ethereum supply is expected to peak at 120 million. After that, it will continue to drop and then go down. Meanwhile, demand will rise. It is likely that the number will rise.
Lark Davis (@TheCryptoLark), September 24, 2021
Ether traded at $3,006 as of the writing, an increase of more than 300% over the previous year.
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