Everything About the Ethereum London Hard Fork Update with EIP-1559 | Will This Impact The Price of ETH?

2021/08/19 10:01:29

Scalability, sustainability, and security have always been the core pillars in the Ethereum upgrades. And for some time now, it has been gradually converted from the Proof of Work (Mining) to the Proof of Stake (Staking) consensus method. The major milestone occurred with the completion of the London fork on August 5, 2021, at 12:33 pm UTC at the block height of 12,965,000.

This hard fork is also accompanied by one of the most significant and most controversial changes: the EIP-1559.

What is EIP-1559?

EIP stands for Ethereum Improvement Proposal. The EIP-1559 is one of the most fundamental changes in the Ethereum network. And the concept of gas fees is now wholly overturned. So far, the miners, i.e., the executors of the transactions on the Ethereum blockchain, could set the transaction fees at their own discretion.

EIP-1559 is different from all previous EIPs on Ethereum. It reduces the high gas charges associated with the Ethereum network and fundamentally changes Ethereum's monetary policy. Ethereum could even become a scarce commodity than Bitcoin as a result of the upgrade. In addition, investors hope that the EIP-1559 will reduce the high increase in ETH transaction costs in recent months.

Since the integration of the London Upgrade on the Mainnet, the base fees are set by an algorithm replacing the previous gas fees. The base fee takes into account the degree of utilization of the network and adapts accordingly by increasing or lowering it. At the same time, there is a dynamic change in the block size so that overloads and traffic jams in the network can be counteracted. During the transaction, however, this base fee is burned, and no one receives these fees.

Ethereum's Deflationary Monetary Policy

The EIP-1559 has a significant impact on Ethereum's monetary policy. ETH could become one of the scarcest cryptocurrencies in the entire market through the upgrade. That's because the entire base fee, which is the fee everyone has to pay to execute transactions on Ethereum, disappears permanently. Since this fee is paid in ETH, more ETH is burned when more transactions take place. Therefore, there is a possibility that the fee burning will massively counteract future inflation of the ETH supply.

And as Kevin O'Leary puts it, it's akin to a company's share buyback strategy. In the long term, the price of the shares increases. That means we can expect a steady long-term appreciation of ETH.

With EIP-1559, this is what will happen. The approximately 13,000 new ETH issued to miners every day as payment fees will significantly reduce. This reduces the amount of ETH newly circulated, and miners will earn less in the future. However, transactions should become more predictable in terms of price for users who use Ethereum dApps.

However, the London hard fork is not the first and not the last upgrade of Ethereum for this year. The Berlin upgrade went live in April. Both Berlin and London are preparatory steps for the final transition from Ethereum 1.0 to Ethereum 2.0, i.e., the switch from proof-of-work to proof-of-stake.

In October 2021, the Shanghai Hard fork will be the last step towards merging the two ETH versions.

Earnings through Tips and Miner Extractable Value (MEV)

Due to the abolition of gas fees, the miners were effectively deprived of their source of income. Therefore, it is all the more understandable that the operators of the Ethereum mining facilities were not very pleased when it was announced in March 2021 that the EIP-1559 is a done deal.

But the miners do not have to do without income or financial incentives. In the future, users will be able to pay a surplus payment, the tip, in addition to the basic fee. This allows them to obtain the preferred processing of their transaction on the blockchain. These tips are given to the miners. More so, to compensate for the loss of revenue in the future, miners can utilize the MEV. This allows mining operators to benefit from their influence in block composition and position more rewarding transactions further ahead in the chronology of processing.

Closing Thought

Whether EIP-1559 will have this positive effect on the price of Ether remains to be seen. London is undoubtedly one of the most important upgrades of recent years, but immediate effects on the ETH price are not to be expected – if so, this will happen over time. The most significant change was the EIP-1559. Gas fees were replaced by base fees, which are burned after the transaction. In addition, traders can now add tips to the base fees to prioritize the execution of their trades.

Since one of the primary sources of income of the miners, the gas fees, has now disappeared, the tips can compensate for the potential loss to some extent. To what extent this happens remains to be seen.

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