What EIP 1559 brings to the Ethereum table – Explica .co






Source: Adobe / H_Ko

Ethereum (ETH) is changing. It is not only in the gradual transition to a proof-of-stake consensus mechanism (PoS), but is only a few months away from a significant overhaul of its monetary system through the Ethereum Enhancement Proposal (EIP) 1559.

EIP-1559 suggests splitting the Ethereum gas fees into two parts: a tip, which can be set by the sender of a transaction, and a base fee, which is then burned. It is this last element that some have claimed will turn Ethereum into a deflationary crypto asset and make it a serious storage rival for Bitcoin, according to ETH Field.

According to industry players speaking to Cryptonews.com, this shift cannot happen overnight as Ethereum will have to move entirely to PoS before the deflationary aspect of EIP-1559 actually kicks in. Some analysts also suspect that Ethereum may not hit the traffic level. So token burns outweigh inflation.

‘Only time can tell’

Developer Ryan Berckmans explains that EIP-1559 will destroy most gas rates, although the effect is unlikely to be immediate.

“EIP-1559 is expected to burn around 70% of tariffs, that’s deflationary pressure. However, if EIP-1559 kicks off on July 14th, ETH won’t go deflationary immediately as evidence of mining will continue to result in net inflation until Ethereum switches to evidence of stake this year, ”he told Cryptonews.com.

However, inflation should turn negative when Ethereum 2.0 is finally released.

“After moving to PoS, ETH is expected to be deflationary as the amount of ETH that EIP-1559 is likely to burn out far exceeds expected overall PoS inflation

Not everyone agrees with this prediction, some argue that Ethereum could go deflationary even before the PoS, and some argue that the burned ETH will not exceed the newly minted ETH (via block rewards).

“The deflationary effects of EIP-1559 should be immediately apparent and will become increasingly common as Ethereum devotes itself fully to demonstrating its use,” the blockchain company said. ConSensys ‘Lex Sokolin.

He added that the more transactions that take place, the more deflationary the base rate burn will be. On the other hand the eToro analyst Simon Peters is not convinced that the burning of interest rates consistently outperforms inflation.

“In my opinion that is unlikely. As Layer 2 solutions like rollups are being developed to scale the current Ethereum blockchain and reduce congestion on the network, I do not expect congestion to reach a point where it becomes deflationary. But only time will tell, ”he said.

A trend to watch out for

With Ethereum 2.0 and the switch to PoS, the picture becomes even more complicated. This is because PoS not only eliminates mining, it also results in a significant portion of ETH getting tied into the Ethereum 2.0 share contract.

“Since the start of the deposit agreement in November 2020, approximately 4.4 million Ethereum tokens have been blocked, which is not far from the total amount that has accrued over the past 12 months. However, that bet came about in half the time and could accelerate as more exchanges and wallets support betting on Ethereum 2.0. So this is definitely a trend to watch out for, ”said Simon Peters.

At the time of writing, ETH’s stake has actually increased to 4.6 million and could accelerate further after the transition. This is partly supported by the fact that validators can earn significant interest by betting on ETH.

“The APR for the Validator is 7.4% today and is expected to rise to over 20% on the day of the merger. Of course, 20% is big business for validators, and the result will be a dramatically higher level of validator engagement, which further stimulates the demand for ETH, ”said Ryan Berckmans.

Now ETH 32 (currently almost USD 86,530) is required to become a validator.

In addition, validators without proof-of-work mining have fewer costs to cover.

“On the supply side, miners have to sell a lot of ETH to cover their hardware and energy costs, which increases the circulating supply. After switching to proof of use, validators don’t necessarily have to sell ETH as validators are so cheap to run that they’re effectively free, ”added Berkmans.

In other words, after switching to EIP-1559 and PoS, there will be a “supply crisis” as validators sell less ETH and holders bet more.

Ethereum versus Bitcoin

The perennial question in crypto has almost always been whether Ethereum is “better” than Bitcoin (BTC) (and vice versa), and it comes as no surprise that the Ethereum camp is saying that EIP-1559 and PoS will give Ethereum a distinct advantage .

“I think it is 100% guaranteed that ETH will change BTC in the next few years, and BTC will likely change in the next 6 to 18 months. It is important to understand that Bitcoin’s cost issue will make it difficult for BTC to maintain a multi-trillion dollar valuation, ”Berckmans said.

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As a more neutral observer, Simon Peters said that Ethereum could certainly compete with Bitcoin as a store of value in the future, but that it depends on a number of factors.

“While Ethereum isn’t a set offer, arguably there are more factors that could make it more deflationary than Bitcoin, like Ethereum’s lockdown, its ability to attract investors who own Ethereum, and because it’s often a requirement for transactions and smart Contracts. Operations. Therefore, there is a possibility that fewer tokens will be in circulation, but the demand will continue which will increase the price, ”he said.

As some argue, the flaw of the deflationary argument is that anyone can create a “new digital currency that will reduce supply by 5% per year and be controlled by a single issuer on a Google spreadsheet” and “ETH’s monetary policy This again weakens the credibility that politics will not change in the future. “

In a broader sense, Peters concluded that Ethereum can maintain its status as the leading platform for decentralized finance (DeFi), smart contracts, etc. and prevent competing platforms from gaining market share: “So it has the potential to grow even more . “

Ultimately, regardless of whether it will compete with or outperform Bitcoin, the potential for further growth is the main message that Lex Sokolin draws from the changes ahead.

“When Ethereum receives more computing power and transaction power over several software developments, more developers, applications and companies will be attracted. That will lead to better software, greater savings and more usage, ”he concluded.

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Learn more:
– “Educational Show of Force” fails as the new EIP suppresses the dissatisfaction of the miners in Ethereum
– The fees for Ethereum remain high even with EIP-1559, says another analyst

– What does Ethereum expect in 2021?
– Ethereum does not hide from quantum computers behind the PoS shield

– Why Ethereum Is Far From Ultrasonic Money
– Ethereum’s economy is a house of cards

– ETH can flip Bitcoin, but not “have your cake and eat it too” – Arthur Hayes
– DeFi in Bitcoin is set to grow in the shadow of Ethereum

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