An on-chain study released by Kraken Intelligence highlighted strong accumulation behaviour among Ethereum miners even as they faced the prospects of generating lower revenue following a major network upgrade on Aug. 5, 2021.
Ethereum miners accumulated an additional 2 million Ether (ETH) worth $6.1 billion after the so-called London Hard Fork’s activation. The latest bout of accumulation caused miners’ net Ether holdings to hit an all-time high of 22.3 million ETH (worth nearly $70 billion), which is almost 19% of the total Ether supply.
“ETH accumulation was stagnant for most of the summer before picking up speed in July in spite of ETH price trending lower,” the Kraken report read.
“However, ETH accumulation amongst miners really took off after EIP-1559 as they likely saw the disinflationary effects of the upgrade to drive up the price.”
EIP-1559, which went live alongside the London Hard Fork on Aug. 5, divided transaction fees (chargeable via native token ETH) into two parts: Base Fee and Priority Fee.
The network started charging base fees to add transactions to the Ethereum blocks. Meanwhile, it introduced priority fees—or voluntary tips—that Ethereum users pay to miners to speed up transactions.
But EIP-1559 changed the way Ethereum’s token economy works by introducing a fee-burning mechanism. In doing so, the improvement proposal started burning the base fee, thereby making ETH a disinflationary asset by permanently removing a part of its supply out of circulation.
Burning a portion of total fee collection would also mean a drop in revenue for Ethereum miners. As a result, EIP-1559’s launch sparked warnings about lower mining profitability, with one study finding that miners’ revenue dropped by 15% right after EIP-1559 went live.
But that didn’t deter the miners from raising their exposure in the Ethereum market, insofar that ETH’s hash rate reached a record high of 736.67 terra-hash per second (TH/s) on Sept. 23.
That is despite a drop in Ethereum mining activity following China’s crypto crackdown in May, which later led the hash rate to a three-month low of 477.54 TH/s. Kraken wrote:
“This tells us that not only was the reaction to the China crackdown exaggerated, but miners also view the latest upgrade as an overall boon for ETH that outweighed the con of its miner reward reduction.”
Ethereum miners survived the EIP-1559 FUD primarily due to rising ETH prices and high network demand led by a boom in the nonfungible token (NFT) space.
Kraken noted that miner revenue reached a near four-month high of $70 million on Sept. 7, rising 27% a month after the Aug. 5 upgrade as “NFT activity in projects such as PALS, Loot, and Junkies likely pushed priority fees higher.”
But a recent slump in the NFT sector, led by strong corrections in the number of its daily active users (-23%), trading volume (83%), and transaction count (-31%), also pushed the miner revenue down.
Nonetheless, the amount of ETH held by miners surged to its highest level to date, prompting Kraken to deduce that they were accumulating and mining Ether tokens to become validators on the upcoming Ethereum proof-of-stake chain, dubbed Ethereum 2.0.
Users need to stake 32 ETH into Ethereum 2.0 smart contracts to become validators on its network. In response, they may earn up to a 5% annual percentage rate. As of Sept. 29, ETH 2.0 had attracted 7.813 million ETH worth $2.85 billion by 48,780 unique depositors, as per data provided by CryptoQuant.
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Meanwhile, as more Ether tokens go out of actively supply due to staking and EIP-1559 activation, the prospect of holding ETH might appear profitable for miners due to the classic supply-demand model.
Ether was trading at $3,006 at the time of writing, up more than 300% year-to-date.