Ethereum is the most popular blockchain for building DAPPs or decentralized applications. There have been numerous so-called Ethereum killers but the blockchain has remained a favourite for the developers due to its high composability. DeFi or decentralized finance originated on Ethereum and till now majority DeFi activity is taking place on this blockchain only. The growth of DeFi has been really exponential post-pandemic and people are really loving to take part in the lending-borrowing activity without the intervention of a third party. The problem is that DeFi has made the blockchain overloaded. Ethereum is facing terribly high congestion for the last few months and transaction fees have skyrocketed. Crypto Twitter is flooded with frustrated users complaining about paying astronomical fees for doing a $20 swap over DeFi platforms. The base layer scalability of Ethereum is a distant game but the Ethereum developers are working on some major EIPs or Ethereum Improvement Proposals to address various issues.
EIP- 1559: Transaction fee reform
EIP-1559 is an Ethereum improvement proposal scheduled to be implemented during the London hard fork (July 2021). Ethereum has an auction-style model for processing transactions. Ethereum’s gas fee is the fee paid to the miners for validating a transaction. The price of gas is dependent on the market mechanism, and it is difficult to predict fees. EIP-1559 will make the transaction fee predictable even during high transaction hours. The proposal changes the current bid-based model to a base fee structure. If the blockchain utilization rate is more than 50%, the base fee will increase automatically, and if the utilization rate is less than 50%, the fee will decrease. It will bring changes to the economic model of the blockchain and be considered one of the most important updates of Ethereum. EIP-1559 proposes to burn a portion of the transaction fee. EIP-1559 proposes to burn a portion of the transaction fee. You can compare it with ‘buyback of ETH’ technically. There is a high possibility that EIP-1559 will make Ethereum a deflationary asset besides reducing transaction fees. The community is already calling ETH ‘ultrasound money’ to compare it with the ‘sound money’ concept of BTC.
EIP-3074: Introduces batch transactions
EIP-3074 is another improvement proposal to improve the user experience of Ethereum. It is slated for the Shanghai hard fork (October 2021). EIP-3074 will reduce transaction costs by creating support for batch transactions. Currently, batch transactions are not supported in the base layer of Ethereum. Batch transactions can happen in a smart contract i.e., only DAPPs can support. The proposal wants to allow a wallet to avail batch transactions. Their blog post says, “a good analogy for the benefit this EIP provides is that it’s similar to allowing any EOA to become a smart contract wallet without deploying a contract.” The proposal is really very different as it aims to allow users to delegate control of their EOA (externally owned accounts) to a contract. EIP-3074 is motivated by ‘sponsored transactions’ i.e., it wants to make users able to send transactions in which the fees are paid by a different party. EIP-3074 should reduce the Ethereum transaction fee by 20% as the intrinsic gas cost will be reduced by batch transactions.
EIP-3675: Chain merge
EIP-3675 is an improvement proposal created for the network’s upcoming chain merge. Ethereum is moving to PoS (proof-of-stake) from PoW (proof-of-work) and this proposal formalizes the chain merge. EIP-3675 implementation date is not clear as only the pull request has been created on Github. After the launch of the Beacon Chain, Ethereum 2.0 has become the second-largest staking network and the chain merge will initiate high inflow to the one-way deposit contract of Ethereum 2.0. Liquid ETH in the circulation will be decreased dramatically.
There is no doubt that Ethereum is the preferred value settlement layer now. All these EIPs will be implemented phase-wise, but these will make Ethereum an attractive blockchain for the retail DeFi traders. Layer 2 Ethereum projects line Polygon, Arbitrum and Optimism are already making roars in the market but base layer usability matters. 2021 is going to be an exciting year for Ethereum with major protocol updates and nice progress towards Ethereum 2.0. The positive growth of price also justifies market sentiment regarding Ethereum. While this article was finished, ETH was trading above USD 2300 and ETH/BTC ratio was waiting for a breakout moment.
Note: This post was first published here for Cryptowriter.
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