EIP 1559 results in most of the gas charges being destroyed. ETH could compete with BTC as a store of value, but that depends on a number of factors. Ethereum needs to keep its status as the main platform for DeFi, smart contracts and “so on”.Source: Adobe / H_Ko
Ethereum (ETH) is changing. Not only is it making the gradual transition to a Proof-of-Stake (PoS) consensus mechanism, but it is only a few months away from significantly revising its monetary system via Ethereum Improvement 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 latter element that some have claimed will turn Ethereum into a deflationary crypto-asset and make it a serious rival for the store of value of Bitcoin, according to the ETH camp.
According to industry officials speaking to Cryptonews.com, this shift may not happen overnight as Ethereum will have to move entirely to PoS before the deflationary aspect of EIP-1559 really kicks in. Some analysts also suspect that Ethereum may not hit the traffic level, causing Token Burns to outperform inflation.
‘Only time can tell’
Developer Ryan Berckmans explains that EIP-1559 will result in most gas charges being wiped out, although the effect is unlikely to be immediate.
“EIP-1559 is expected to burn ~ 70% of the fees, that’s deflationary pressures. However, if EIP-1559 hits the market on July 14th, ETH won’t go deflationary immediately as proof of work mining will continue to generate net inflation until Ethereum switches to proof-of-stake this year, ”he told Cryptonews. com.
However, inflation is likely to turn negative when Ethereum 2.0 is finally rolled out.
“After moving to PoS, ETH is expected to be deflationary as the projected amount of ETH that will be burned by EIP-1559 far exceeds the expected total inflation of PoS, which is <1% inflation," added Berckmans .
Not all agree with this prediction, some argue that Ethereum could go deflationary even before the PoS, and some argue that burned ETH will not outnumber re-minted ETH (via block rewards).
“The deflationary effects of EIP-1559 should be noticed immediately and will be even more widespread once Ethereum fully moves to proof-of-stake,” said Lex Sokolin of blockchain company ConSensys.
He added that the more transactions that were made, the more deflationary the burning of the basic fee would be. On the flip side, eToro analyst Simon Peters is not convinced that fee burning will permanently outweigh inflation.
“In my opinion that is unlikely. Given that 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 keep an eye on
The picture is made even more complicated by Ethereum 2.0 and the switch to PoS. This is because, in addition to the abolition of mining, PoS will also result in a significant part of ETH being blocked in the Ethereum 2.0 staking contract.
“Since the start of the deposit contract in November 2020, around 4.4 million Ethereum tokens have been blocked, which is not too far removed from the total that has arisen over the past 12 months. That staking happened in half the time, however, and could accelerate if more exchanges and wallets support Ethereum 2.0 staking. So it’s definitely a trend to watch out for, ”said Simon Peters.
At the time of writing, the amount of ETH potted has actually increased to 4.6 million and could accelerate further after the transition. One of the factors contributing to this is that validators could arouse considerable interest in staking at ETH.
“The Validator’s APR is 7.4% today and is expected to rise to over 20% on the day of the merger. Of course, 20% is an extremely large sum for validators and the result will be a dramatically increased participation among validators, which will further fuel demand for ETH, ”said Ryan Berckmans.
Now you need ETH 32 (currently just under 86,530 USD) to become a validator.
In addition, the validators have to cover fewer costs without proof-of-work mining.
“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 moving to proof-of-stake, validators don’t necessarily have to sell ETH as validators are so cheap to run that they’re practically free, ”added Berkmans.
In other words, after the switch to EIP-1559 and PoS there will be a “supply crisis” as the validators sell less ETH and the holders use more of it.
Ethereum vs. Bitcoin
The eternal question with 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 ETH will flip BTC 100% within the next few years and will likely flip BTC in the next 6 to 18 months. It is important to understand that BTC will struggle to maintain a multi-trillion dollar valuation due to Bitcoin’s cost issue, “Berckmans said.
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 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 staking ability, from investors who hold Ethereum, and because it’s often a prerequisite for transactions and smart Contracts is operations. As a result, there is a chance that there will be fewer tokens in circulation but demand will remain, which will drive the price up, ”he said.
However, some argue that 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 “with one change the monetary policy of the ETH “. The credibility that politics will not change in the future is weakened again. “
In both cases, Peters came to the conclusion that if Ethereum succeeds, its status as the main platform for decentralized finance (DeFi), smart contracts etc. has potential for further growth. “
Whether it will compete with or overtake Bitcoin, the potential for further growth is ultimately the most important message Lex Sokolin extracts from the changes ahead.
“The provision of more computing power and transaction throughput for Ethereum through multiple software developments will attract more developers, applications and companies. That will lead to better software, greater savings and more usage, ”he concluded.
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