Ethereum’s long-awaited Merge took place in September, shifting it from a legacy proof-of-work (POW) model to the sustainable proof-of-stake (PoS) consensus algorithm. Many observers expected Ether’s (ETH) price to respond positively as its daily emissions declined 90% with the halt of mining operations. 

However, the expected price surge never occurred. In fact, Ether has been down by over 7% since the upgrade. So why didn’t the Merge drive up the coin’s price?

Post-merge ETH monetary policy

Ethereum’s monetary policy was simply to reduce the token’s supply to 1,600 ETH per day. The PoW model, an equivalent of 13,000 ETH were emitted daily as mining rewards. However, this has been wholly eliminated post-Merge, as mining operations are no longer valid on the PoS model. Therefore, only the 1,600 ETH supply remains for staking rewards, cutting its daily supply by 90%. If the average gas price on the Ethereum network becomes at least 16 gwei, the 1,600 ETH would be burned every day, making Ethereum’s inflation zero or even triggering a deflation.

Related: Tax on income you never earned? It’s possible after Ethereum’s Merge

This monetary policy was a key driver for Ether’s price hike expectations. However, users didn’t consider the impact of marketing sentiment and regulatory changes. The deflationary model was established to impact ETH’s price long-term when the blockchain’s supply growth is in the negative zone.

The token supply growth since the Merge has been -0.01%, which means roughly the same amount of ETH was produced as the amount burned through transaction fees. Although this metric indicates deflation, it’s not substantial for increasing the token’s price — especially when liquidation remains high across the crypto marketplace.

The state of ETH deflation

Presently, ETH is deflating. The number of outstanding tokens fell by more than 10,000 over the last two weeks, while a total of 3,037 new tokens have entered the market since the Merge. New token supply increased until Oct. 8, as Ethereum remained in inflation. Since then, more tokens have been burned through transaction fees, making ETH deflationary.

More than 49,000 ETH has been burnt in the last 30 days, at an average rate of 1.15 tokens per minute. It seems that Ether’s supply has reached its peak, and the supply growth will continue to decrease significantly. So, what happened on Oct. 8 that triggered this deflation for the first time?

Related: Federal regulators are preparing to pass judgment on Ethereum

It was mostly due to a new blockchain project called XEN Crypto. Since its launch, XEN Crypto has burned over 5,391 ETH in transaction fees, making it second on the ETH Burned leaderboard, marginally behind Uniswap V3. The rate of transactions and ERC-20 token minting was significant between Oct. 8 and Oct. 15. The average gas price that week was 37 gwei, more than double the “ultrasound barrier” of 15 gwei, which triggered this deflation.

For now, as long as Ethereum’s gas price remains above 15 gwei, the network will burn enough tokens to keep it deflationary.

Why isn’t Ether’s price rising?

Although the mechanism introduced by the Merge and the current state of deflation is technically supposed to drive prices upward, the timing is simply not suitable. The prices of any cryptocurrency are not just based on its supply and burn mechanism — liquidation also plays a significant role.

The U.S. Federal Reserve has been aggressively increasing interest rates for the past few months. As a result, government treasury bonds have been producing significant yields, and these bonds have much fewer risks than crypto. There’s also more regulatory pressure on the crypto space, and with the recession running wild, short-term investors are stepping away from volatile assets.

Related: Post-Merge ETH has become obsolete

Coinglass data shows that ETH liquidations have been especially high for the past two months. This is primarily the reason why ETH’s price has not increased, and instead declined despite its deflationary status.

Deflation: an impact in the long run

Overall, deflation will certainly show an impact in the long run. If a bullish cycle appears, it will lead to increased network usage, thus increasing gas prices. This will result in a more substantial decrease in the token’s supply, and a possible price surge might appear. Liquidation has been slowing down in the past few days, as ETH prices seem to have reached a sustainable resistance level. However, whether or not a bullish cycle appears soon will depend on the market sentiment.

Iakov Levin is the founder and CEO of Midas, a custodial crypto-investment platform for DeFi assets.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.