The much-rumored Ethereum hard fork was finally deployed on August 5 after the 12,965,000 block was mined. Dubbed “London”, the software update will bring together major alterations to the Ethereum code. In general, the code changes seek to improve the network’s transaction fee market, user experience, and much more.
London comes with five Ethereum Enhancement Protocols (EIP), and EIP-1559 has garnered the most attention due to the impact on transaction fees and miners’ income, initially prompting miners to oppose it., raising concerns about protocol consensus and a potential chain split.
The EIP-1559 was originally proposed in April 2019 and underwent testing in June prior to its launch. The most pressing thing about EIP-1559 is that it is mainly aimed at improving the Ethereum transaction payment system. Before the update, most users faced uncertainty, as transaction fees on the Ethereum network can be volatile, costing hundreds of dollars per transaction. The EIP-1559 is unlikely to substantially reduce transaction costs as it is more of a scalability issue. But nevertheless, It aims to reduce volatility and delays in transaction fees.
EIP-1559 transaction fees, base fee, and miners’ tips
The update introduces a fixed price vending mechanism with a base rate and a tip instead of a single gas rate. Miners receive the full transaction fee minus the base fee, which is burned. This base rate is a known value that is calculated for each block and is adjusted based on a target block size. Users can also send an additional tip to miners, in addition to the base fee, to prioritize their transactions.
Miners’ incentives do not change, as the most expensive transactions are selected first to fill the blocks. However, the sender strategies are now clearer than in first price blind auctions. Rather than guessing rates based on recent transactions, users can directly view the base rate metric and add their tip.
Can EIP-1559 go back to deflationary ETH?
With all these changes, one of the most popular questions in the community is whether activating the EIP-1559 will make Ether (ETH) more deflationary. Ether does not have a hard supply limit like Bitcoin; its inflation is continuous, and is capped at 18 million ETH per year, which is used to reward miners.
But nevertheless, there are also deflationary forces in the supply of Ether. First, locked liquidity in decentralized finance, which is home to about $ 155 billion at press time, lowers the negotiable offer. Secondly, there is a continuing index of lost or unrecoverable Ether. Finally, there is the new EIP-1559 protocol.
Since London was deployed, a total of 26,965.9 Ether have been burned, according to Etherchain.org. At the current Ether price, that translates to about $ 86 million in ETH. In the six day period after the hard fork, the new supply of ETH from the block rewards was reduced by about 33% per day due to burn rates.
The EIP-1559 has increased deflation on Ethereum, but it is still an inflationary asset overall. To get an idea of how base rate burning impacts the circulating supply of Ether, the report compares last year’s data to create a hypothetical scenario where the London hard fork would have unfolded in 2020. The calculation implies a rate. current burning of 3.81 Ether per minute, which assumes that everything remains constant.
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This resulted in a burned supply of 3 million Ether, about 17% of total inflation per year. This causes a significant reduction in inflation, which is predicted to increase the shortage of Ether in the long term.
At current market price, this equates to roughly $ 10 billion worth of Ether burned since January 2020.. Given Ether’s current $ 378 billion market capitalization, this is a hefty 3% of the Ether supply value withdrawn from circulation.
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