There is exciting news in the crypto world.
A brand new protocol is completely changing the way people buy, sell, and trade Ethereum.
This will have a HUGE impact on any blockchain-based project, from decentralized funding to non-fungible tokens to cloud storage and more.
In today’s Market Insights video, Steve Fernandez and I discuss why this could be the catalyst driving up the price of Ethereum and other cryptos.
(If you’d rather read a transcript, click here.)
Jan König: Hello everybody. Ian King here, back from the Metaverse with your weekly Market Insights video.
Today my colleague and friend Steve Fernandez joins me again. Steve how are you out there
Steve Fernandez: IM fine, thanks.
What is EIP-1559?
Jan: Let’s talk about the big news in Ethereum land this week.
There’s this huge upgrade, that hard fork in the network called EIP-1559 that happened to Ethereum today.
Steve, can you please explain to our viewers exactly what this is and then we’ll talk a little more about what it means for Ethereum.
Steve: Yes, the Ethereum Improvement Protocol is what you just posh described. And it’s an evolution of the way “gas charges” are determined.
Basically, a gas fee is the amount a user of the Ethereum network has to pay to have their transaction verified. In the past there has been an auction system where users of the network essentially bid in an auction format to determine how quickly their transaction will be processed by the network.
That could end up having some repercussions where you place really aggressive bids or people who just want a quick turnaround and see very extreme gasoline charges at certain points.
With this new update, this gas fee is now set as a basic fee, with an algorithm that generates a basic fee based on network activity. And now, to try to process your transaction sooner, you can just tip the miner.
So that’s the first aspect of the update. The second aspect of the update that the market seems to be quite excited about is that now, if you pay those fees on your transactions, the Ethereum will be burned. So that creates a deflationary effect. Or in other words, it reduces the supply of Ethereum, which generally leads to higher prices.
You know more than anyone that this could have a pretty big impact on the Ethereum rollout.
Jan: Necessarily. And to take a step back for a moment, I want to explain gas charges and how I think people should think about them.
Think of the Ethereum blockchain protocol as a kind of digital road or digital infrastructure. If you drive down Interstate 95 and come to a tunnel, you will know exactly what the toll will be.
Well, for most of Ethereum’s life, with the tolls you paid, you never really knew what the price would be. They always paid attention to how congested the network was. But now with this suggestion, and specifically with what you say, the tolls are known. We will know what the tolls are.
And not only that, if you pay the toll to use the network, they are actually just burning the token, which means that they are taking the offer off the market, which is generally or simply economical. If the supply goes down and the demand stays the same, then the price goes up. Right?
So there will be a demand-supply balance which is why I think we’ve seen about a 50% rally in Ethereum in the past few weeks as the excitement for this Ethereum Improvement Protocol 1559 takes effect.
I mean, do you think this is the right way to think about it, Steve?
Steve: Necessarily. And I would go one step further. I think not only will it require to be held constant, I think it will increase.
Now you have new developers and users drawn to the Ethereum network because they have a better idea of what fees they are paying. In the past, it was difficult to scale an application when one day you might be surprised to find yourself paying high fees. And that can have a very negative impact on the scaling of these applications and the real usability for the masses.
But now the developers of these applications can determine exactly how much they will spend. And that makes it easier to build more robust and even more cost-effective applications for users.
I think the demand will actually go up and that would possibly help prices even more.
Jan: And let me give our viewers an example of how the fee will help some of those apps that you pointed out.
Take decentralized finance, for example. This is basically a new era of finance based on the blockchain that allows people to do two digital items without having a history of each other and without a central intermediary.
Think of decentralized finance as if it were decentralized stock exchanges like the New York Stock Exchange. But instead of doing transactions on the floor of the New York Stock Exchange, I am trading my cryptocurrency on a smart contract with another user who I want to buy something from and who wants to sell it.
Now Ethereum is necessary because you have to pay that low toll to conduct the transaction to run this smart contract. And in the past, when the markets are freaked out, either falling sharply or rising sharply, the price of that toll increases exponentially.
And I think Steve, you have a diagram that you might want to share with our viewers right now.
Steve: Necessarily. Yes, you can see from this graph that gas charges fluctuate a lot over time as I described earlier.
Well, there is usually a period of time during a day when gas prices are generally higher. It’s around noon. But over time, if you look at this chart, there are only huge extremes. And I’m assuming these will be slightly narrower, meaningless extremes in the table from now on after this update was released today.
So it should be interesting to see.
Jan: And I can tell you from personal experience, I know that some of my subscribers to my crypto newsletter had the same thing.
If the market is falling or rising and you want to use the decentralized exchange to get in or out of a position, you could trade $ 1,000 worth of cryptocurrencies and the gas fee is around $ 100. OK? So you pay a 10% fee just to make a trade.
I mean, this is highway robbery. The New York Stock Exchange used to do that with traders. This is not the future of finance.
I love the new protocol and how it not only pulls supply out of the market but also causes less price volatility in relation to the amount of gas you are paying for.
But I think the bigger picture for the direction we’re going with Ethereum is the “ETH 2.0” roadmap.
It started last November when they opened ETH 2.0, where you actually stake your Ethereum on the network. This is another improvement protocol that will limit gas tariff volatility.
What is the future of Ethereum?
The future of Ethereum is really moving from the so-called proof of work to the proof of stake.
And that will do Ethereum in a flash. It will process over 100,000 transactions per second, which is roughly 500 times what the network can currently handle.
So we come to a world where we can take all of the traditional finances and put them on the blockchain to take out the middleman, cut fees, take power from banks and let people unlock the value of their own wealth. And today’s move is just a stepping stone on the way.
So Steve, now that volatility has been reduced, are you excited to start trading more on decentralized exchanges?
Steve: Yes, I mean, they are more predictable so you can be more opportunistic when trading.
And if you’re actually investing in Ethereum as a token, the new Proof of Stake consensus mechanism, ETH 2.0, allows holders to earn staking rewards by holding their tokens.
So, you know, I think this is also a long-term driver of investment value in Ethereum, not just participating in the network.
Jan: Exactly. And it’s not just decentralized funding.
I mean, we’re looking at protocols for decentralized cloud storage and network bandwidth usage. All of the different types of digital applications moving onto the blockchain. That’s why this space is so exciting – and one of the best places to invest in the next 10 years.
Have a nice weekend for me and my colleague Steve Fernandes and we will speak to you again next week. Thank you.
Editor, Strategic Fortunes
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