Ethereum’s London hard fork, which went live on August 5th, ushered in a new era for the transition to Ethereum 2.0, a full Proof-of-Stake (PoS) blockchain. In fact, the London upgrade is the penultimate step on the road to the definitive transition to PoS, which is slated for sometime in 2022. The upgrade was triggered almost punctually at 12:33 p.m. UTC at the block height of 12,965,000.
Along with the highly anticipated Ethereum Improvement Proposal (EIP) 1559, this upgrade brings four more EIPs to the network, EIP-3554, EIP-3541, EIP-3198 and EIP-3529. The most important change that EIP-1559 brought with it is the management of transaction fees on the blockchain. In the previous pricing mechanism, the transaction fees would go straight to the miner, but now there is a fixed network fee per block that is burned. Ultimately, this means lower transaction fee income for miners.
A representative from ConsenSys, a blockchain technology company that powers Ethereum’s infrastructure, told Cointelegraph about the excitement of network users compared to the initial dissatisfaction of miners:
“Users seem to be a lot more supportive of the hard fork because it gives them more predictable gas charges. To date, 97.5% of customers are ready for the London hard fork. Because of this, EIP-1559 has become mainstream in the community and is the main proposal approved by the Ethereum community included in the London Hard Fork. “
However, miners still have an additional source of income via the two Ether (ETH) rewards they receive for each newly minted block. The EIP-1559 also adds the concept of a “tip” to the transaction pricing mechanism. The tip can be viewed as a priority fee so that applications and users can pay when they want their transaction to be prioritized by the network.
Kent Barton, Head of Research and Development at ShapeShift, a cryptocurrency trading platform, discussed with Cointelegraph the impact of EIP-1559 on community dynamics, saying, “The miners’ reduced profitability of 1559 led to initial resistance from this part of that Ethereum ecosystem. However, there was no realistic alternative, 1559 had broad support from the rest of the community. “
MEV should gain in importance before the merger
Barton believes the miners have decided to abandon their opposing stance, as a controversial hard fork is not only unpopular, but would also trigger a retreat in the ETH price that ultimately runs counter to their own interests. In response to the decline in direct miners’ revenues, several mining pools have begun using Miner Extractable Value (MEV) solutions to increase their net revenues.
MEV is a metric that measures the profit a miner, validator, or sequencer can make by leveraging their ability to benefit from arbitrage by including, excluding, or rearranging transactions in produced mining blocks. MEV solutions can only be triggered and executed by miners, as only they have the authority to organize transactions within a block in the network.
Speaking to Cointelegraph about MEV, Caleb Sheridan, a core developer at Eden Network, a priority transaction network, said, “MEV (Miner Extractable Value) is more important than ever. Miners are finding new ways to increase their income after the cut in EIP-1559. These techniques and tools will find their way to the proof-of-stake, where validators will use them to increase their sales. “
Sheridan went on to mention that MEV solutions offer onboard miners higher rewards for “honestly participating in the network’s proposed ordering protocol”. This means that these solutions would remain relevant for validators even after the PoS changeover has been completed.
It is important to remember, however, that one of the main goals of the London upgrade through EIP-1559 was to curb the problem of the high gas tariffs that the network has had throughout the Bull Run from the end of the fourth quarter of 2020 to the middle of the second In the second quarter of 2021, when the London upgrade was triggered on August 5th, gas charges have also shown an increase.
Gas prices rose 44% from 45.77 Gwei on August 4th before the upgrade to a 45-day high of 65.22 Gwei on August 10th. Gwei is a quantity that is used to calculate gas charges. Gwei or a gigawei is a small unit of ether known as the smallest base unit of the token. One gwei equals 0.000000001 ETH, or vice versa, 1 ETH equals 1 billion gwei.
However, this rise in gas charges could only be a function of the increased network congestion that attracted the asset’s price movement and the upgrade itself. It is noteworthy that this increase in gas charges is still much lower than the gas charges the network imposed in May, when ETH was last trading in its current price range.
These increased gas charges are now being burned instead of going to the miners, resulting in the destruction of some ether tokens from the network’s economy. This burning effect of the EIP-1559 increases deflationary pressure on the token. The ConsenSys representative further discussed this, saying:
“Investor sentiment towards ETH as an asset appears to be reacting to the decreasing supply of ETH due to EIP-1559. 23k ETH have already been burned, slowing the rate of new ETH emissions (which is paid in the form of block rewards for new blocks added to the chain). “
At the current rate of burns, 2.3 ETH are destroyed every minute. This means that at the current market value of the token, ETH tokens worth 10.7 million US dollars are burned daily. However, that burn rate has given way to the “deflationary assets” narrative for Ethereum’s native token. But in reality, this upgrade doesn’t really make Ether a deflationary asset, it just reduces the rate at which it is currently inflating. In fact, Ether will remain inflationary even after the transition to Ethereum 2.0 is complete.
A model made by Justin Drake from the Ethereum Foundation revealed that the “best estimate” is 1,000 ETH per day and 6,000 ETH are burned in the same period. His model assumes that the annual decrease in supply will be 1.6 million Ether tokens as more Validators join and the annual percentage return (APR) / return of the stake is 6%, which is the annual supply rate for the asset on 1.4% reduced. This model confirms that the token would still be an inflationary asset, just one with higher deflationary pressures.
ETH outperforms BTC, among other things
This hard fork for Ethereum has resulted in huge gains for its native token. ETH fluctuated above $ 3,000, around 30% below the all-time high of $ 4,362 it hit on May 12, 2021 May 19 – a day now known as “Black Wednesday”.
Although Bitcoin (BTC) has also seen impressive gains over the past seven days, Ethereum has once again outperformed the leading cryptocurrency. The seven-day gains for ETH are 29.62% compared to 21.69% for the Bitcoin price. While the London upgrade is an important step in the Ethereum roadmap, the movement it represents is much bigger. It’s the influence of institutional investors, non-fungible tokens (NFTs), decentralized funding (DeFi), and the public’s distrust of centralized funding (CeFi).
Armstrong went on to comment on the comparison: “The London upgrade was an important step in the Ethereum roadmap, but his move against Bitcoin is more than just London: it’s a network effect of institutional investors, NFTs, DeFi summer and distrust to CeFi. ”Mike McGlone, a senior commodities strategist at Bloomberg Intelligence, even mentioned that Ethereum could pave the way to Bitcoin at $ 100,000.
Related: Bitcoin dominance is increasing again as the crypto market recovers
The next step for Ethereum would be the final merger to proof-of-stake, which according to ConsenSys “will probably take place in early 2022”. The ConsenSys representative also announced that some analysts believe that staking payouts will soon more than double to $ 20 billion and will double to $ 40 billion by 2025.
Whether these predictions will come true or not, market sentiment is showing that despite the market slump between June and July, Ether is further cementing its place as a cryptocurrency with benefits, especially with network upgrades like the London hard fork spurring its growth by spurring already existing ones Vulnerabilities such as gasoline charges are addressed.
The community appears to be responding well to what ConsenSys founder and Ethereum co-founder Joseph Lubin called the introduction of ultrasound money. Even Shark Tank celebrity Kevin O’Leary has perpetuated the ultrasound money narrative, citing the lack of a supply area as the reason.