What impact will Ethereum's upcoming production cut have on its price?

Ethereum Production Reduction Agreement

In the "Constantinople" version, Ethereum's consensus algorithm will change from proof-of-work (PoW) to a hybrid consensus algorithm of proof-of-work and proof-of-stake (PoS) to improve the efficiency of the entire Ethereum blockchain, reduce costs, and eventually transition to the fourth phase of the pure proof-of-stake consensus algorithm. One of the most notable improvements is the reduction in production, and the block reward will be adjusted from 3ETH to 2ETH.

What is ETH production reduction?

Previous news about Ethereum’s 33% production cut caused a stir in the bear market.

The price of ETH also fluctuated due to the spread of this news, which can be summarized in one sentence: "The Ethereum protocol will implement the Constantinople upgrade at block height 4200000." Specifically: "At that time, the reward for generating a new block will be reduced from the original 3 ETH to 2 ETH (a 33% reduction)."

Then at the Ethereum Core Developer Conference held on December 7, developers finally determined that block 7,080,000 on the Ethereum blockchain would be the hard fork activation point. Users can choose to upgrade to the new code from this block. According to the current block budget, the hard fork upgrade will be completed around January 14-18, 2019.

If this is a little hard to understand, the simplest way to put it is this - if Ethereum users choose to implement the Constantinople hard fork by upgrading the software, all functional updates will not take effect until block 7,080,000 is mined.

In addition, Martin Holst Swende, head of security at the Ethereum Foundation and "go-ethereum", revealed that in order to ensure that there are no unexpected problems during the Constantinople hard fork upgrade, they have released an upgraded version of the "go-ethereum" software, which includes an "emergency switch" function that allows users to delay the upgrade when an abnormality occurs.

In addition, Ethereum’s expansion plans such as sharding and casper mechanism will not appear in the upcoming Constantinople hard fork, because this is a small upgrade that includes five independent improvement plans (EIPS) to facilitate the transition from proof of work (Pow) to the more energy-efficient proof of interest (PoS) consensus algorithm.

Constantinople hard fork has twists and turns

Looking back, the Ethereum Constantinople hard fork has been full of twists and turns. Initially, the hard fork was scheduled for November this year, but later because of the failure of the test network deployment in October, the core developers announced that they would postpone the plan to release the Constantinople system upgrade project on the test network Ropsten.

Among other things, the delay will give Ropsten users room to test other ethereum projects, such as off-chain scaling solution Raiden, in order to prepare for a potential fork leading to the implementation of Constantinople, which ethereum developers hope will make the blockchain more efficient by simplifying the platform’s code design.

However, Ethereum still tried to delay the implementation of the so-called "difficulty bomb" for 18 months - in fact, the Difficulty Bomb protocol was created shortly after the birth of Ethereum, making mining more and more difficult over time.

In the "Constantinople" version, Ethereum's consensus algorithm will change from proof-of-work (PoW) to a hybrid consensus algorithm of proof-of-work and proof-of-stake (PoS) to improve the efficiency of the entire Ethereum blockchain, reduce costs, and eventually transition to the fourth phase of the pure proof-of-stake consensus algorithm. One of the most notable improvements is the reduction in production, and the block reward will be adjusted from 3ETH to 2ETH.

When we hear about production cuts, we can’t help but imagine that the bull market cycle seems to follow the halving cycle.

Previously, some self-media believed that we can clearly see in Etherscan that the block height has reached more than 6400000, far exceeding the said block height of 4200000, so they mistakenly believed that this fork would only be carried out on a test chain of Ethereum, which has nothing to do with the main chain and has no impact on ETH or even the overall market.

However, although 4200000 does refer to the block height in the Ethereum test network, the significance of the Ethereum test network is to test the feasibility of various improvement measures. The block height may be lower or higher due to different test chain startup times. For example, the main network has reached more than 6.4 million blocks, while the test network has only reached more than 4.2 million blocks.

This testnet fork is actually testing the feasibility of the Ethereum network switching from PoW to PoS. This means that if the fork in the testnet does achieve the goal of improving efficiency, reducing costs and energy consumption, and is conducive to the smooth transition of the Ethereum network from PoW to PoS, then the fork will be applied to the main network.

The Ethereum testnet is a separately run blockchain designed to facilitate the development and testing of smart contracts. It has the same properties as the mainnet, and ETH in the testnet can be obtained for free to avoid ETH losses caused by bugs.

In general, the news of this production cut is good for Ethereum. The reduction in circulation will cause the cost of miners to rise, and it will also lay the foundation for the improvement of Ethereum's performance, thereby indirectly stimulating price increases. The purpose of the production cut is to better achieve the transition from PoW to PoS, improve efficiency and reduce costs.

Of course, these may still be on the long-term level. We are still in a bear market, and any positive reaction is limited. It may not be a good thing for miners. It should be said that the timing of this upgrade is not very good. When ETH has fallen badly and many mining machines are struggling with the shutdown price, the profit is cut by one-third.

However, the goal of Ethereum is also to reduce the income of miners, gradually eliminate POW mining, and switch to POS.

Will new coins be issued?

In fact, for many coins, hard fork means more of an upgrade rather than necessarily splitting into two coins.

As the leading project in the blockchain 2.0 era, Ethereum’s pioneering concept of smart contracts has changed the landscape of the blockchain market. On the one hand, there is no doubt that 96% of the top 100 tokens on the market were created through Ethereum. On the other hand, the bull market in 2017 was undoubtedly driven by Ethereum.

Now that Ethereum is about to upgrade, this time the upgrade of Ethereum is different from the upgrade of BCH. BCH is analyzed within the community, causing BCH to fork, and it is unknown where it will go in the future. In particular, the recent BCH fork incidents have emerged one after another. Miners can create a currency with a market value of billions of dollars by making a slight modification to the BCH source code, and obtain huge profits through pre-mining. This has seriously disrupted the market order, undermined the security of the blockchain network, and is not conducive to the long-term healthy development of the blockchain.

The Ethereum Foundation has always maintained a strong position in community development and will not see this happening. This decision was made not only to implement Ethereum’s original development plan and improve Ethereum’s performance, but also to create an expected positive impact on Ethereum’s future price and reduce inflation.

Moreover, this upgrade of Ethereum is the unanimous result reached by the development team and is also a step that was scheduled to be taken in the Ethereum white paper, although this result seems to have come a little late, and it came after repeated postponements.

ETH was forked into ETC due to a hacker incident. It was quite chaotic during that period and Ethereum also dropped a lot, but looking back, it was actually nothing. Therefore, I personally feel that the probability of a new token is not high.

In addition, the performance of Ethereum can be improved by upgrading the protocol, which will have an impact on the second-layer protocol (Layer 2) and other public chains. On the one hand, the growth of the underlying network will make the second-layer network and related expansion plans meaningless, such as Raiden Network and POA Network.

On the other hand, the Ethereum community has almost the largest number of developers and dApps under development in the world. After the performance is improved, it may be bearish for other public chains in the short term.

If there are no problems with Ethereum’s upgrade next month, it will be a step towards POS. The subsequent expansion plans may be implemented in the next two years.