5 August 2021: Arguably the most highly anticipated Ethereum update outside of ETH2.0, EIP-1559 is a significant update to the monetary policy of Ethereum itself. With the introduction of Ethereum "burning", this update is enthusiastically anticipated to add a deflationary mechanism to Ethereum, helping to make the asset more scarce. This article will explore what the EIP-1559 update means for Ethereum and how it may influence the broader cryptocurrency market.
Support Independent Journalism & Research - Become a Supporter on Patreon
Basics of EIP-1559
Ethereum Improvement Proposals (EIPs) specify novel potential novel feature updates or network upgrades that would be encompassed into the main Ethereum code, becoming the new legitimate network for the community. EIP-1559 is a major change to the underlying monetary policy of Ethereum. This update would make direct changes to the gas fee system through a process that includes burning ETH, helping to make the asset more scarce. As of the London hardfork, this update has now been implemented.
The gas fee system that Ethereum was using included an auction-based approach in which the user attempting to send a transaction would submit bids to be included on a block. Because of the bidding, transaction fees get run up and congestion causes the rate of transactions to run slower. To counter this, within the new update is the inclusion of a base fee which helps to alleviate volatility and make gas prices more predictable. If there is more traffic, the base fee is higher. If there is less traffic, the base fee is lower. Miners receive an incentive for each transaction included on a block through a standardized tip.
What It Means
Essentially, the idea is that the base fee gets burned and the miner receives the tip for each block. By burning the base fee, over time Ethereum becomes more scarce, helping to push the price up and increase the overall security of the network. This is especially important when considering the future change form proof-of-work (PoW) to proof-of-stake (PoS) with the launch of Ethereum 2.0.
Theoretically, this update should assist the network is running more efficiently, specifically with regards to the gas prices. It should also help to provide a potential deflationary tool for Ethereum in reducing the supply over time. In other words, by holding Ethereum, over time as the supply becomes more scarce, the price will naturally increase even without changes in demand.
With the lead up to this official London hardfork update and the launch of EIP-1559, the price of Ethereum is up nearly 56% off the bottom that was printed back in mid-July. In fact, much of the cryptocurrency market has rebounded in recent weeks. The dip and reversal that took place 21 July definitely appears to have been a bear trap as the cryptocurrency market continues to show upward momentum.
Bitcoin and Ethereum have been pulling the rest of the market upwards. Specifically with Ethereum, the new EIP-1559 launch will absolutely have a major impact on price implications for Ethereum going forward. Just the hype for the update alone, Ethereum is carrying some upward momentum that will also directly influence positive price implications for any projects associated with the Ethereum network. Alt coins in general may finally experience some modest upward price action, a stark shift from the volatility of recent months.
Summary
This new update to Ethereum will undoubtedly help improve the network moving forward. With the rise of multiple formidable competitors, it is absolutely essential that the Ethereum developers stay on top of potential needed updates such as EIP-1559, and they have done just that. With the highly anticipated launch of proof-of-stake on Ethereum, the networks still remains on our list of coins worthy of investment as of August 2021. It is certainly a great time to be an ETH hodler.
We plan on expanding the team of writers, researchers, & analysts! Want to help make that a reality? Become a supporter on Patreon!
Support Independent Journalism & Research - Become a Supporter on Patreon
