Ethereum may activate the London hard fork at block height 12965000 (expected on August 4), and the Ethereum Gas fee mechanism and inflation model will usher in important changes.
Original title: “London Hard Fork, EIP-1559, Ethereum 2.0”
Written by: Tracy
Ethereum is experiencing its biggest upgrade in its history, and this is the beginning of the crazy release of value by Ethereum holders and users.
How the London hard fork effectively uses Ethereum as a blockchain and investment. We will look at Ethereum and some upgrades that will bring incredible value to investors and users.
In the past three months, we can see that prices fluctuate sideways. Overall, this is clearly the integration stage of the crypto market. We can also see that during this period of time, when Bitcoin has fallen back from its historical highs, the total value locked in DeFi has of course also declined.
DeFi has locked up about 56 billion U.S. dollars in assets, of which AAVE, InstaDApp and Curve Finance currently rank among the top three in Ethereum.
56 billion may sound a lot, but we can easily add 0 to this number, but before that we do need to upgrade Ethereum.
London hard fork
On August 4, 2021, Ethereum will experience what is called the London hard fork, and it will pass block 12,965,000.
A proposal called EIP-1559 appeared in the London hard fork, which will completely change the way users and investors view Ethereum. EIP-1559 will change three main aspects,
Clearly link the usefulness of decentralized applications to Ethereum.
It will reduce transaction waiting time and eliminate the uncertainty of free market charges.
It will add a statement similar to the limited supply of Bitcoin.
Ethereum gas fee
A huge change in EIP-1559 is the way fees are paid. Currently, gas fees are paid by users to compensate for the computational energy required to process and verify transactions on Ethereum.
Essentially, if users want to trade, they must pay. Those of us who have used DeFi and Ethereum DeFi in the past know that the cost of Ethereum may be a thorny issue.
In a period of very high demand, the blockchain cannot cope with this situation due to some reasons, so users must bid higher. Currently, demand has fallen, and the fee is actually quite competitive at 44 cents, which is not expensive. However, these costs can be as high as US$10, US$20, US$50, or even US$100. If you want to trade $500 and pay a fee of $100, this is completely unacceptable.
What will change the rules of the game for Ethereum users? Investors who like certainty also believe that EIP-1559 will replace the auction system of Ethereum users bidding for block space and turn it into the protocol itself, which actually determines the gas price.
EIP-1559 will introduce a basic fee. This is dynamic and it will change based on network usage. But the agreement itself will determine this and let users know how much they need to pay, rather than users just blindly bidding on their transactions.
Now, the Ethereum blockchain itself will change the computing power of a block, and the goal is about 15 million gas per block. But this may decrease or increase depending on network usage.
For each increase or decrease, the agreement will increase or decrease the amount of gas by approximately 12.5%.
There is also a fee called tipping. So, if users really want their transactions to be completed before others, they can tip the miners so that they can complete the transactions before others.
However, it is crucial that EIP-1559 does not change the scale of the network, so during periods of high demand, the charges may continue to be extremely high. On Etherscan, we can see the history of its Ethereum gas fees. When the demand is very high, the gas will rise accordingly. When the usage drops, the gas fee will also decrease, and the transaction fees we pay will also decrease.
What does this mean for users and investors? Having a network without reliable and predictable fees is not a long-term solution at all. Considering other upgrades of the network (such as extensions, zk-rollups), they will decrease over time, but this is a very important first step.
Next, we have the destruction mechanism, which will now be included as an upgrade.
Ethereum burn
Here is a chart of Ethereum’s inflation rate. Essentially, every new block created, that is, two new Ethereum tokens called Ether, are created with it. The more people who use the network and transact on it, it means that more Ethereum is created, which may mean that Ethereum has a completely unlimited supply just like fiat currency.
This is why many Bitcoin extremists say that Ethereum is basically a scam. Just like fiat currency, it can be inflated to zero over time. This means that over time, if the price itself does not exceed the rate of inflation, investment will also be inflated.
EIP-1559 also attempts to solve this problem. These two ETHs are not for miners. They may only be sold on the market, increasing the supply of Ethereum and the inflation fee paid on the network. Now these two ETHs in each block will be destroyed and they may be completely eradicated.
Once paid, the basic cost will be destroyed and permanently removed from the total circulating supply of ether. The reason for burning basic fees, rather than allocating them to miners, is to ensure that miners are not motivated to artificially block the network and keep the basic fees high.
This sounds great to users, but we cannot deny the fact that reducing the supply of Ethereum is also very beneficial to investors, because they may see the supply of Ethereum going on over time And reduce.
The potentially unlimited supply of Ethereum has always been a thorny issue. Developers and industry investors have seen this kind of inflation, and some people are therefore hesitant to invest.
However, according to Coindesk’s report, we can see that if we upgrade EIP-1559, transaction fees may consume about 4% of Ethereum’s current annual supply increment.
The very high inflation rate of 4% at that time may drop to 2%, 1% or even 0% inflation. If the user has Ethereum, assuming that the inflation rate is 1.5%, this is actually very similar to Bitcoin’s current inflation rate.
Because of the Bitcoin code, it will only have 21 million tokens. But with this upgrade, Ethereum may completely eliminate or at least reduce the inflation of its token supply.
If the token has only 1% inflation, then as the long-term demand for Ethereum increases, this should mean that over time, the actual price of Ethereum tokens will rise over time and compare with other assets. Than, it will not be exaggerated.
Ethereum future
In the future of Ethereum, we have an EIP-1559, which makes gas fees more reliable, and also introduces the destruction of tokens to reduce inflation. However, this is only half of the problem.
Ethereum is still undergoing two other major upgrades. The first is Ethereum 2.0, which will move the blockchain from Proof of Work (PoW) to Proof of Stake (PoS).
One of the main advantages of Proof of Stake (PoS) for investors is that with Proof of Stake (PoS), investors will receive new token rewards to invest and establish nodes, and hold their tokens to ensure the network Decentralization. In addition, Vitalik Buterin stated that Ethereum 2.0 will greatly reduce the issuance of Ethereum tokens.
All of these are potentially positive for the price of Ethereum. More investors, more investment, lower inflation, this is a solid foundation and overall support for the price of Ethereum.
One of the reasons for doing Proof of Stake (PoS) is to greatly reduce the issuance of tokens. Therefore, in the ETH 2.0 specification, we give a calculation. If everyone participates in the Ethereum blockchain, then the theoretical maximum circulation will be 2 million tokens per year.
For other reasons, Ethereum 2.0 is very important. It will increase institutional adoption, and the mortgage reward may be around 4%. This means that institutions can know at the time of investment that their investment will be profitable in the long term as long as they are mortgaged.
More investment in decentralization is also beneficial to the Ethereum DeFi ecosystem, and AAVE is currently ahead of the locked-in ecosystem with the highest value.
Companies such as AAVE, Compound, and Curve Finance can now build a customer-oriented ecosystem on top of Ethereum. AAVE will launch an institutional DeFi lending platform called AAVE Pro.
With EIP-1559, there is a reliable cost. ETH 2.0 brings more decentralization and the ability to earn income through mortgages. In the future, you can also use extended solutions such as zk-rollups, and even layer2 solutions such as Polygon Network. The latter does use the Ethereum base layer as The basic layer of transactions.
This is good news for Ethereum tokens, because Ethereum has been locked as the preferred currency for settlement of these transactions at the base layer. If there are Ethereum tokens, they can now be staked on Ethereum 2.0, but unfortunately, they cannot be taken out before Ethereum 2.0 is actually launched. It may take 6 to 12 months at present.
Ethereum price prediction
However, there are still some institutions that are optimistic about Ethereum. Goldman Sachs is very optimistic about Ethereum.
They even stated that Ether currently seems to be the cryptocurrency with the highest practical potential, because the platform of Ethereum as a native digital currency is the most popular smart contract application development platform.
How do we evaluate the current price of Ethereum and the future price.
One of the easiest methods for any cryptocurrency is NVT or network value to transaction ratio.
Users can think of NVT as the price-to-earnings ratio of stocks. Calculate NVT by dividing by the network value. This is basically the market value of cryptocurrencies. We know that the current market value of Ethereum is approximately $250 billion.
Divide the market value or network value by the daily transaction volume. Therefore, if the network value is higher than the transaction volume, it will give a high NVT value.
Having a high NVT value is actually a bearish move. It can tell us that the price may be a bit high compared to the actual value and transactions that take place on the network.
Therefore, we can see that the uptrend of NVT is considered bearish. It tells us that prices are rising, and the growth of transactions is slow relative to the growth of value and market value.
The downtrend is bullish. This means that the growth rate of transactions occurring on the network exceeds the growth rate of market capitalization. A simple graph or Ethereum can tell us everything we need to know over time. It can be seen that in January 2021, we can see the gray price increase, but the NVT decline, which is very optimistic.
The price of Ethereum has increased the number of transactions at a faster rate. Of course, this cannot predict the future, but it is a good indicator. We can see that NVT is at one of its lowest points, so this really tells us the basic principles of Ethereum. It is growing. People are using it, and if this happens, the price may rise further in the future.
in conclusion
In the next 10 years, the total value locked in DeFi will continue to grow substantially.
EIP-1559 can introduce token burning to reduce inflation. It can also make these more predictable, and in the future, there may be extended solutions that may reduce overall costs and improve the network’s ability to process more and more transactions.
All these basic factors seem to be positive for Ethereum, which is why these institutions are now sniffing Ethereum with the hope that there will be many upgrades in the next few years.
