Monday marked the end of a painful quarter for Ethereum, as the network’s native asset’s so-called burn rate fizzled amid one of its worst performances in recent memory.

The metric, which tracks the rate of Ethereum removed from circulation, recently hit its lowest level since August 2021, a nagging concern among investors that’s “weighed on Ethereum’s market performance,” according to the crypto market maker Wintermute.

Last week, around 53 ETH was burned per day, the firm said. Meanwhile, ETH’s supply has increased 3% since an upgrade called EIP-1559 took effect, according to Ultrasound Money.

The lower burn rate underscores how ETH’s ability to accrue value has shifted since developers embraced layer-2 scaling solutions a year ago. Since then, Ethereum’s so-called issuance has been net positive, yet some experts believe institutional adoption trends could change that.

During the first quarter, ETH’s price plummeted 45%, wiping away $170 billion in market value, according to crypto data providers CoinGecko and CoinGlass. That represented the third worst quarter for ETH going as far back as 2016. 

Years ago, user activity on Ethereum became a core driver of ETH’s value, when Ethereum developers implemented a fee-burning mechanism called EIP-1559 in August 2021.

While Ethereum’s users previously paid transaction fees to miners, the network started burning them instead, reducing the asset’s circulating supply in relation to network activity.

When Ethereum later transitioned to a proof-of-stake consensus model in 2022, making miners obsolete and vastly reducing the network’s carbon footprint, the rate at which new ETH is issued was also reduced. Together, the upgrades made Ethereum’s circulating supply deflationary.

EIP-4844, an upgrade that significantly reduced the amount of ETH burned by layer-2 networks, changed that dynamic. As user activity has gravitated toward those scaling solutions, transaction fees have fallen on Ethereum too, recently hitting a five-year low of $0.40.

During the pandemic-era crypto boom, so-called gas wars plagued Ethereum users, who sometimes paid upwards of $4,000 for a single transaction. NFT projects were a common yet ultimately beneficial source of congestion, like those tied to Bored Ape Yacht Club. 

Tokenize Everything

As Wall Street starts migrating on-chain, some analysts believe that ETH could become deflationary again, if institutions end up bringing trillions of dollars of assets with them.

The process of taking real-world assets, such as stocks and bonds, and representing them on-chain as digital tokens is referred to as tokenization.

In a letter to shareholders,  Larry Fink, CEO of the world’s largest asset manager, BlackRock, mentioned the term a dozen times.

“One day, I expect tokenized funds will become as familiar to investors as ETFs,” Fink wrote. “Every stock, every bond, every fund—every asset—can be tokenized.”

Excluding Ethereum’s layer-2 networks, $5 billion worth of real-world assets have been tokenized on Ethereum, accounting for 54% of the market, according to RWA.xyz. The measure excludes stablecoins, which are often backed by cash and U.S. Treasuries.

That sum could broadly grow to $16 trillion by 2030, according to a paper published by Boston Consulting Group in October, but estimates from experts vary widely.

“We’re not seeing the economic benefits from tokenization yet,” Bitwise Senior Investment Strategist Juan Leon told Decrypt. “This is going to take longer than people want it to because these large asset managers don’t move very quickly.”

Edited by James Rubin