In early August, during the London hardfork, the developers of the Ethereum network successfully implemented the so-called EIP-1559 upgrade, which was intended to slow down the pace of cryptocurrency release.
It also introduced a mechanism for burning commissions in each Ethereum block paid by network users for conducting transactions. As a result, the innovation exceeded all expectations: the day before, the emission of altcoin during the day not only decreased, but even became negative. In other words, for the first time in history, miners mined less ETH per day than they burned.
The idea of burning cryptocurrency was important to the Ethereum ecosystem. The fact is that the maximum amount of ETH is not limited, so this asset was inflationary. In August 2020, on the air of a podcast with cryptocurrency lover Peter McCormack, Ethereum creator Vitalik Buterin said that he even slightly envies the idea of Bitcoin being limited at 21 million coins.
Now, after the introduction of EIP-1559, ethers may, among other things, become less. This is a strong argument in favor of a cryptoasset, because the limitedness of something is good for the price. This idea has already been proven by NFT tokens, for which tens of millions of dollars are sometimes spread.
Note that after Ethereum’s transition to the Proof-of-Stake mechanism, ETH will become deflationary on a regular basis. In this case, much less new ethers will be created, and the volume of combustion will remain approximately at the same level. According to the developers of the Ultrasoundmoney platform, ETH supply will decline by about 1.8 percent every year.
A historic moment for Ethereum
EIP-1559 was literally meant to save one of the industry’s most famous projects. Due to the sharp increase in the use of decentralized protocols and the huge popularity of unique NFT tokens, the fees on the Ethereum network became huge by the end of the summer.
To solve the problem, EIP-1559 introduced the concept of a base commission for each transaction. Recall that earlier commissions were formed on the basis of an auction, when the first transfers to the block were those of the network participants who paid the most to the miners. Now the base commission is set automatically depending on the workload of the blocks and burned. At the same time, miners themselves support the economic benefits of their activities thanks to additional payments from network users.
Note that EIP-1559 itself was not supposed to reduce commissions in the Ethereum network, but only to make their changes smoother. As we mentioned earlier, Eth now has an algorithmic model that automatically changes the commission level by no more than 1.125 times per block. Accordingly, the indicator may increase to the previous heights, but this does not happen so abruptly.
At the same time, EIP-1559 is not able to secure Ethereum from overloads, since it does not affect the technical features of the blockchain in any way. This means that the Eth network can still handle about 13 transactions per second and is vulnerable to massive blockchain congestion. Ethereum will be able to conduct thousands of transactions per second after switching to the Proof-of-Stake consensus algorithm. This event is expected to take place in the first half of 2022.
While EIP-1559 slows down the rate at which the supply of ETH is growing, the upgrade does not have to reduce the supply of coins itself. This is because with every block produced, miners still receive the newly mined ETH as a reward. Accordingly, as long as the number of newly mined coins exceeds the burnt commissions, the total ETH supply increases.
At the same time, network fees remain high. We checked the current data: now you need to pay about $ 10 for a fast transfer of ethers, while exchanging coins on the Uniswap decentralized exchange costs almost $ 95.
According to Ultrasoundmoney, more than 212,000 ETH have been burned since the upgrade was integrated . At the current exchange rate, this is the equivalent of $ 835 million .
True, more Ethereum was burned on Friday than the 13 thousand ETH produced by miners during this period. The reason for this is simple: the commission is now a dynamic value not because of the auction, but thanks to an internal regulatory mechanism that depends on the demand for network resources. And the demand was huge the day before.
Accordingly, at the end of the day, the total number of ethers in circulation was less than at the beginning. This situation is visible in the chart below.
Evan van Ness, founder of the Week in Ethereum News platform, ran a small calculation of the burn rate on his Twitter account. Miners process 4.5 blocks per minute with 2.1 ETH rewards per block, meaning they mine 9.45 ETH every minute. Last week, the rate of burning was able to rise to 9.6 ETH , that is, the network “destroyed” about 0.2 ETH every minute , Decrypt reports.
Note that thanks to the rapid growth in the price of ETH, it is now very profitable to mine. Moreover, the threshold for entering ether mining is much lower than for Bitcoin mining. Traditionally, we recommend mining ETH and other coins on the 2Miners mining pool. There are already almost 80 thousand miners on it, an abundance of cryptocurrencies for mining in two modes, as well as fast and friendly support.
A gradual decline in Ethereum’s supply can give the asset a huge market incentive, as even with the same level of demand, its value will continue to rise. This means that it is never too late to get involved with ETH, as the deflationary coin will constantly attract new investors.
We believe that the idea of burning ethers has paid off. The asset is gradually becoming deflationary, and its release rates have already noticeably decreased. Accordingly, now ETH looks more promising even against the background of BTC, which simply has a limited maximum supply. And although fees on the blockchain are still high, investors have much more reason to contact ethers. Therefore, now we are waiting for active purchases of ETH from large companies by the type of acquisitions of bitcoins from MicroStrategy.