Ethereum is the most popular platform to build decentralized applications.  The majority of decentralized finance or DeFi activity is happening on Ethereum only.  Numerous wrapped tokens are arriving on Ethereum to take part in the thriving ecosystem.  Yes, people love to use this blockchain, but it also makes the blockchain overloaded.  We have seen clogging of Ethereum blockchain due to high transaction volume during the 2017 ICO boom, sudden popularity surge of the lovable digital kittens of the blockchain game Cryptokitties and the recent DeFi boom.  Ethereum, which is touted as the ‘world computer,’ is quite aspirational.  Still, there are limits on the number of computations performed at a time, and often a particular application can put pressure on the network.  There is no doubt that Ethereum has scalability issues, and that’s why so many Ethereum killers exist!  Ethereum 2.0 will solve many problems for Ethereum, but base layer scalability is a distant game.  The major technical work to make Ethereum 2.0 workable is progressing at a slow but steady pace.

The arbitrary transaction fee of Ethereum

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.  Sometimes, the gas fee is as low as 10-15 gwei, and sometimes it is as high as 100-150 gwei.  The larger the gas fee you pay, the more miners pick your transaction faster.  When there is a sudden surge of transactions, the users bid more gas fee for faster processing of their transactions.  The transactions set with a low gas fee are generally not picked up by the miners and remain stuck.  The reason: Crypto Twitter is flooded with frustrated users complaining about paying a $100 fee for doing a $20 swap over DeFi platforms. Ethereum has been designed like this, but this is not a sustainable practice.

EIP 1559 can be a blessing

EIP 1559 (Ethereum Improvement Proposal), first proposed by Vitalik Buterin in 2018, is a planned upgrade for the Ethereum blockchain.  It’ll make transaction fees predictable, and even in case of increased activity on the network, the fee will remain at a lower side. It will also make transactions quicker.  The spotlight is back on EIP 1559 due to a recent abnormal surge in ETH transaction fees.  Filecoin, a decentralized storage platform, tried EIP codes on their testnet with good results.  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.  There will be an option to pay a ‘tip’ to the miner, and it’ll provide a way to move up the queue.  The base fee and tip are paid in ETH.  Wait a moment!  The base fee is going to be burnt.

ETH as a deflationary asset

This transition is a fundamental change to the economic model of Ethereum.  ETH becomes a deflationary asset with EIP implementation. In this tweet of Aug’20, Vitalik has already expressed that it seemed logical to cancel PoS rewards post EIP 1559 for ETH 2.0.  This adaptation would likely create a positive price impact on ETH as potential investors may find it very attractive.

EIP proposal is supposed to be introduced as a hard fork.  Many mining companies may not like the proposal as it’ll reduce their earnings.  It is important to note that the Ethereum blockchain’s cumulative fees were more than any other blockchain, including Bitcoin, in recent months.  In some months, the transaction fee revenue was almost half of the block reward revenue for Ethereum, and it, unfortunately, made Ethereum less secure.  There is a long-standing debate between Bitcoin maximalists and the Ethereum community regarding the non-fixed supply of ETH.  The Bitcoin maximalists don’t accept the store-of-value aspect of ETH and point to the fixed 21 million supply of Bitcoin.  ETH can’t satisfy the ‘sound money’ theory unless EIP is implemented.  EIP implementation may take some more time, but 2021 can be an exciting time for Ethereum with several new signs of progress. ‘Free market reform’ of Ethereum can be interesting to watch.

Note: EIP1559 implementation deadline isn't fixed yet. This post was first published here for Cryptowriter in association with voice.com.

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