The London fork of Ethereum, which was implemented on August 5, ushered in a new era for the transition to Ethereum 2.0, a full proof-of-stake (PoS) blockchain. In fact, the London update marks the penultimate step on the way to the final transition to PoS, scheduled for sometime in 2022. The update went live almost on time at 12:33 pm UTC at the block height of 12,965,000.
Along with the highly anticipated Ethereum Enhancement Proposal (EIP) 1559, this update brings another four EIPs to the network, EIP-3554, EIP-3541, EIP-3198 and EIP-3529. The main change that EIP-1559 brings is the management of transaction fees on the blockchain. In the old pricing mechanism, the transaction fees went directly to the miner, but now there is a fixed network fee per block that is burned. This ultimately translates into lower revenue from transaction fees for miners.
A representative of ConsenSys, a blockchain technology company that supports Ethereum infrastructure, told Cointelegraph about the enthusiasm of network users compared to the initial discontent of miners:
“Users seem to be much more supportive of the hard fork because it gives them more predictable gas rates. Today 97.5% of customers are London fork ready. That is why the EIP-1559 has become normal. among the community and is the most important proposal approved by the Ethereum community included in the London fork. “
However, miners still have a source of income in addition to the reward of two Ether (ETH) they receive for each newly minted block. EIP-1559 also adds the concept of “tip” to the transaction pricing mechanism. The tip can be seen as a priority rate so that applications and users can choose to pay if they want their transaction to have priority on the network.
Kent Barton, head of research and development of ShapeShift, a cryptocurrency trading platform, discussed the impact of EIP-1559 on community dynamics with Cointelegraph, stating: “The reduced profitability of miners from 1559 sparked some initial opposition from that part of the Ethereum ecosystem. However, there was no realistic alternative, 1559 had broad support from the rest of the community.”
MEV will gain more prominence before the merger
Barton believes that the miners decided to abandon their opposite stance, as a controversial hard fork, in addition to being unpopular, would also trigger a pullback in the price of ETH, which would ultimately be against their own interests. In response to the reduction in direct income from miners, several mining pools have started to turn to Miner Extractable Value (MEV) solutions to boost their net income.
The MEV is a metric that measures the profit that a miner, a validator or a sequencer can make, using their ability to benefit from arbitrage by including, excluding or reordering transactions within the mined blocks that are produced. MEV solutions can only be activated and executed by miners, as only they have the power to organize transactions within a block on the network.
Caleb Sheridan, A core developer of the Eden network, a priority transaction network, spoke to Cointelegraph about MEV, saying: “MEV (Miner’s Extractable Value) is more important than ever. Miners are finding new ways to increase their revenue after the reduction faced by EIP-1559. These techniques and tools will make it to Stakeholders, where validators will also use them to increase their revenue. “
Sheridan further mentioned that MEV solutions offer embedded miners higher rewards for “honest participation in the management protocol proposed by the network”. This would also keep these solutions relevant for validators after the completion of the PoS transition.
However, it is important to remember that one of the main objectives of the London update through EIP-1559 was to curb the problem of high gas commissions that had plagued the network throughout the bull run since the end of the fourth quarter of 2020. until the middle of the second quarter of 2021. Since the London update went live on 5 August, gas commissions have also seen a rebound.
Gas prices are up 44% from pre-update levels of 45.77 Gwei on August 4 to a 45-day high of 65.22 Gwei on August 10. The Gwei it is an amount used to calculate gas rates. The Gwei or a Gigawei It 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 one billion gwei.
However, this spike in gas commissions could just be a function of the increased network congestion that the asset price action and the upgrade itself attracted. Notably, this spike in gas rates is still much lower than the rates the network charged in May, the last time ETH traded in its current price range.
This increase in gas rates is now burned instead of going to miners, leading to the destruction of some Ether tokens from the network economy. This impact of the burning of EIP-1559 adds deflationary pressure on the token. The ConsenSys representative discussed this further, saying:
“Investor sentiment towards ETH as an asset appears to be reacting to the decline in ETH supply due to EIP-1559. 23,000 ETH has already been burned, which is slowing the rate of issuance of new ETH (which is paid in form of block rewards for new blocks added to the chain) “.
At the current rate of burning, 2.3 ETH is destroyed every minute. This means that, at the current market value of the token, ETH tokens worth $ 10.7 million are burned each day. However, this burn rate has given way to the narrative of “deflationary asset” for the native Ethereum token. But in reality, this update does not make the Ether token a deflationary asset, it simply reduces the rate at which it is currently issued. In fact, Ether will remain inflationary even when the transition to Ethereum 2.0 is complete.
A model made by Justin drake from the Ethereum Foundation reveals that, as a “best estimate”, 1,000 ETH will be issued per day and 6,000 ETH will be burned in the same period. Your model assumes that if more validators join and the Annual Percentage Return (APR) is 6%, the annual decrease in supply will be 1.6 million Ether tokens and, therefore, the annual supply rate of the asset will be reduced to 1.4%. This model confirms that the token would remain an inflationary asset, only with greater deflationary pressure on it.
ETH earnings outperform BTC among other metrics
This fork for Ethereum has brought huge gains for its native token. ETH has fluctuated above $ 3,000, down 30% from the all-time high of $ 4,362 that it reached on May 12, 2021. The token is trading at levels it was trading at in May, ahead of the rapid collapse of most of the cryptocurrency market on May 19, a day now known as “black wednesday”.
Even if Bitcoin (BTC) It has also posted impressive gains in the last seven days, Ethereum has outperformed the major cryptocurrency once again. The seven-day gains for ETH are 29.62% compared to 21.69% for the price of Bitcoin. Although the London update is an important step on the Ethereum roadmap, the movement it represents is much greater. It is the impact of institutional investors, non-fungible tokens (NFT), decentralized finance (DeFi), and the general public’s distrust of centralized finance (CeFi).
Armstrong gave further thought to this comparison saying: “The London update was an important step in Ethereum’s roadmap, but its move against Bitcoin is more than London: it is a network effect of institutional investors, NFTs, the DeFi summer, and the general public’s distrust of CeFi “. Mike McGlone, senior commodities strategist at Bloomberg Intelligence has even mentioned that Ethereum could lead the way for Bitcoin to hit $ 100,000.
The next step for Ethereum would be the final merger to proof of stake, which according to ConsenSys, is “likely to occur in early 2022.” The ConsenSys representative also revealed that some analysts expect that staking payments double to $ 20 billion soon and double again to reach USD 40 billion in 2025.
Whether these predictions come true or not, it is clear that despite the market crash between June and July, Ether is establishing itself as the most useful cryptocurrency, especially with network updates such as the London fork, which they are stimulating their growth by tackling pre-existing trouble spots, such as gas charges.
The community seems to respond well to what ConsenSys founder and Ethereum co-founder, Joseph Lubin, has rated as the introduction of ultrasonic money. Even Kevin O’Leary, of the famous Shark Tank, has further perpetuated the ultrasonic money narrative, citing the lack of a supply floor as one reason.