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The London hard fork has ushered in a new era for Ethereum as the ETH price continues to make progress amid a positive reaction from the community.
Ethereum’s London hard fork went live on August 5, ushering in a new era of transition to Ethereum 2.0, with the goal of completely switching to a proof-of-stake (PoS) blockchain. In fact, the London upgrade is the penultimate step on the road to the final transition to PoS in 2022. The upgrade was triggered almost on time at 12:33 a.m. UTC at block height 12,965,000.
In addition to the much-anticipated Ethereum Improvement Proposal (EIP) 1559, this upgrade brings four other EIPs to the network, namely EIP-3554, EIP-3541, EIP-3198, and EIP-3529. The main change brought by EIP-1559 is the management of transaction fees on the blockchain. In the previous pricing mechanism, transaction fees would go directly to miners, but now, a fixed percentage of network fees in each block will be destroyed. Ultimately, this means that miners will receive less transaction fee income.
A representative from ConsenSys, the blockchain technology company behind Ethereum’s infrastructure, told Cointelegraph that compared to initial miner dissatisfaction, network users have been very enthusiastic:
“Users seem to be more supportive of the hard fork as it provides them with more predictable gas fees. As of today, 97.5% of clients are ready for the London Hard Fork. This is why EIP-1559 has become mainstream in the community and is the most important proposal approved by the Ethereum community to be included in the London Hard Fork.”
However, miners still have an additional source of income beyond the two ETH rewards they receive for each newly produced block. EIP-1559 also adds the concept of "tips" to the transaction pricing mechanism. Tips can be thought of as a priority fee, so that applications and users can choose to pay "tips" if they want their transactions to be prioritized by the network.
Kent Barton, head of research and development at cryptocurrency trading platform ShapeShift, discussed the impact of EIP-1559 on community dynamics with Cointelegraph, arguing that “EIP-1559 made miners less profitable, leading to some initial opposition from that part of the Ethereum ecosystem. However, with no realistic alternatives, the proposal received widespread support from the rest of the community.”
MEV will become more important before the merger
Barton believes that miners decided to abandon their opposition because the controversial hard fork, in addition to being unpopular, would also trigger a correction in the price of ETH, ultimately going against their own interests. In response to the reduction in direct revenue for miners, some mining pools have begun to adopt miner extractable value (MEV) solutions to boost their net income.
MEV is a measure of the profit that a miner, validator, or sequencer can earn by leveraging their ability to benefit from arbitrage by including, excluding, or reordering transactions within the resulting mined blocks. MEV resolution can only be triggered and executed by miners, as only they have the ability to organize transactions within blocks on the network.
Caleb Sheridan, core developer of the Eden Network, a priority transaction network, spoke about MEV in an interview with Cointelegraph, saying: “MEV is more important than before. Miners are looking for new ways to increase their income after the reduction in income they faced in EIP-1559. These technologies and tools will find their way to proof of stake, and validators will also use them to increase their income.”
Sheridan further mentioned that MEV solutions offer increased rewards to miners who join and “honestly participate in the ordering protocol proposed by the network.” This will also keep these solutions relevant for validators after the PoS transition is complete.
However, it is important to remember that one of the main purposes of the London upgrade via EIP-1559 was to curb the problem of high GAS fees, which had plagued the network during the bull run from late Q4 2020 to midway through Q2 2021. GAS fees have also spiked since the London upgrade was triggered on August 5.
The GAS price has risen by 44% from the level of 45.77 Gwei before the upgrade on August 4 to a 45-day high of 65.22 Gwei on August 10. Gwei is a quantity used to calculate GAS fees. Gwei or Gigawei is a small unit of Ethereum and is known as the smallest base unit of tokens. One Gwei is equal to 0.000000001 ETH, or conversely, 1 ETH is equivalent to 1 billion Gwei.
However, this gas fee spike could simply be a function of the asset’s price action and the increased network congestion the upgrade itself attracted. It’s worth noting that this fee spike is still significantly lower than the gas fees the network was charging in May, the last time ETH was trading in its current price range.
These increased gas fees are now burned instead of being given to miners, causing some ether to be destroyed from the network's economy. This burning mechanism of EIP-1559 has the effect of increasing deflationary pressure on the token. The ConsenSys representative discussed this issue further, saying:
“Investor sentiment towards the asset appears to be in response to the reduction in ETH supply caused by EIP-1559. 23,000 ETH have already been destroyed, which has slowed down the issuance of new ETH (paid in the form of block rewards for new blocks added to the chain).”
At the current destruction rate, 2.3 ETH are destroyed every minute. This means that, based on the current market value of the token, $10.7 million worth of ETH tokens are destroyed every day. However, while this rate makes the "deflationary asset" narrative of Ethereum's native token possible. But in reality, this upgrade does not really make Ether a deflationary asset, it just reduces its current inflation rate. In fact, even after the transition to Ethereum 2.0 is completed, Ethereum will still remain inflationary.
A model by Justin Drake of the Ethereum Foundation shows that as a "best guess", 1,000 ETH will be issued every day, and 6,000 ETH will be destroyed during the same period. His model assumes that if more validators join and the annual percentage yield (APR)/yield of staking is 6%, the annual supply reduction will be 1.6 million ether, so the annual supply rate of the asset will be reduced to 1.4%. This model confirms that the token will still be an inflationary asset, but it has greater deflationary pressure.
ETH surpasses BTC in some metrics
Ethereum’s hard fork led to huge gains for its native token. ETH fluctuated above $3,000, about 30% away from its all-time high of $4,362 reached on May 12, 2021.
While Bitcoin has also posted impressive gains over the past seven days, Ethereum has once again outperformed BTC. ETH’s seven-day gain is 29.62%, while Bitcoin’s is 21.69%. While the London upgrade is an important step in the Ethereum roadmap, it represents a much larger picture. It is a joint manifestation of institutional investors, NFTs, DeFi, and the public’s distrust of centralized finance.
The next step for Ethereum will be the final transition to a PoS mechanism, which, according to ConsenSys, “could happen in early 2022.” ConsenSys representatives also revealed that some analysts expect staking payments to more than double soon to $20 billion, and by 2025 they will double again to $40 billion.
Whether or not these predictions come true, it can be seen from market sentiment that despite the market downturn between June and July, Ethereum is further consolidating its position as a cryptocurrency with practical utility, especially as network upgrades such as the London hard fork have stimulated its growth by solving pre-existing pain points such as gas fees. (Cointelegraph) |
