On 5th August 2021, the Ethereum London Hard fork, dubbed EIP-1559, went into effect. For many users, the event marks the end of some long-standing issues in the Ethereum Network.
Namely, the unpredictability of gas prices and the inflationary nature of Ethereum's usage cost during peak periods.
However, one is forced to ask: what potential side defects must Ethereum users now brace themselves for, heading into the future?
More specifically, what would be the new state of the ERC-20 blockchain in the face of the ever-expanding crypto sub-niches like NFT and DeFi?
Background of the EIP-1559 upgrade
To start in our quest of understanding the potential impact of the network upgrade, let's pull the curtain down on what took place on August 5th.
EIPs or Ethereum Improvement Proposals are a specific set of documents that describe new protocol standardization programs for Ethereum's platform.
The network optimization programs are usually implemented as Hard Forks of the Ethereum chain. Since the launch of Ethereum Virtual Machine, the occasion has been held severally.
In this year alone, the Ethereum community has seen the implementation of two hard fork events, the first of which is the Berlin upgrade which took off on April 15.
Next comes the London Hard fork which also comprises five EIPs. Most notable among them was the EIP-1559 proposal.
Aside from introducing a new gas fee structure that will turn Ether into a deflationary asset through some burning mechanisms, the EIP-1559 standard also aims to make transaction fees more stable for users.
How will the EIP-1559 network upgrade work?
Even though it was received with much excitement, the introduction of the Berlin upgrade did nothing to lower the sky-high valuation of ETH's transaction fees. Gas prices became even more critical when the crypto industry faced a major upheaval during the outbreak of DeFi platforms.
To change all that, Ethereum's developers employed two key components in the implementation of the EIP-1559 standard. First is the introduction of the base fee framework for regulating transaction costs.
Before now, Ethereum users had their fate left at the hands of mining gigs operators that were allowed the freedom to set the rate. But the new model uses an algorithm to ensure uniform pricing across the chain.
The base fee is the minimum amount of gas prices that must be provided to mark a transaction okay for processing in a block. An interesting feature of this framework is its flexibility to be high in times of high activities, and vice versa when the market is less busy.
The second core component of the EIP-1559 model is the "inclusion fee" concept. This function allows users to move their transactions up on the waiting queue by including extra incentives for whichever miner picks them.
The benefits of the EIP-1559 standard
For most crypto traders, the most obvious positive impact of EIP-1559 is the recent uptrend in Ether's price. Less than 24 hours after the upgrade's implementation, the price of the token soared to new highs and had more traded volume than Bitcoin.
However, a deeper look at the event reveals a lot of significant technical changes that institutional investors feel happy about. We will look into them one after the other.
The effect of the assets burning feature
Before now, investors have been concerned over the design feature that makes Ether a capless asset as it was programmed to have a limitless supply.
This factor weighed heavily against the use of Ether as a store of value since it was not possible to determine the maximum number of Ethereum that will ever be in circulation.
However, with the introduction of the token burn mechanism, Ethereum's current supply will be on a perpetual gradual reduction process even while new coins are being minted.
And as you would suspect during peak periods, the amount of Ether taken out of circulation will be higher than the number getting added as the base fee is bound to increase. A good example is the increase in NFT transactions recently.
While a low or negative issuance rate of Ethereum cannot be wholly relied upon to predict its price, it does provide an important tool for investors to analyze the outcome of investing in the coin.
Increased role for Ethereum
Another interesting upgrade that has caught the attention of investors after EIP-1559, is that Ethereum now has a much bigger role to play on its chain.
Before now, miners could accept other ERC-20 tokens as optional payment methods for gas fees - instead of Ethereum. In other words, other tokens could take the place of ETH as base fees.
In the EIP-1559 network change, the base fee must be provided in the form of ETH. A miner looking to receive an altcoin as a reward can do so by prioritizing transactions where the inclusion fee is being paid with other tokens.
Else, the mining rig operator will need to provide the required ETH. To sum it up, EIP-1559 aims to create an economy where Ethereum is exclusively used as the preferred payment method.
Thus, as more and more dapps build on its infrastructure, Ethereum will inevitably metamorphose into an astute payment instrument.
Taken together with Ethereum's reputation of being a robust computing system in the blockchain industry, it is easy to see how well this is going to pan out afterward.
Tamper-proof against contentious hard forks
Since the advent of Bitcoin, the crypto community has become accustomed to seeing different fork events go bad. This is because the decentralized nature of blockchain networks made it almost impossible to prevent the continued existence of outdated "standards".
For example, during the Ethereum network fork of 2016, disgruntled miners who were not willing to update to the then latest version of Ether's client software went on to produce "Ethereum Classic".
After the official announcement of the EIP-1559 standard, the possibility of a similar revolt has never ceased to trail its implementation. That was even the very reason it became a hot subject of discussion.
To avert such a developmental pushback, Ethereum developers designed the EIP-3554 proposal.
EIP-3554 aims to force miners' migration to the new Ethereum blockchain by increasing the usage difficulty of the older version. It is part of a long-term plan to turn Ethereum into a Proof-of-Stake network (as opposed to the current Proof-of-Work which is energy consuming).
The yet to be tackled issues as users anticipate ETH 2.0
While EIP-1559 comes with a new feature that will increase gas fees predictability as well as stabilize Ethereum's volatility, it still doesn't mean transactions are going to be cheaper.
However, the fee can only rise and fall by 1.125x per block. That will go a long way to remove uncertainty over Ethereum's transaction cost and strengthen its stability.
Nevertheless, one other concerning problem unsolved by EIP-1559 is the scalability of the Ethereum blockchain.
Even in its present condition, Ethereum can only handle a relatively small amount of transactions per time, compared to competitors blockchain such as Solana, Binance Smart Chain, Polkadot, etc.
It is however expected that the upcoming ETH 2.0 will bring an end to those issues by 2022 when Ethereum will be able to process 100,000 transactions per second (much higher than the current capacity of 30 trans. per second).
This will be made possible through the use of a sharding mechanism. The implementation of EIP-1559 is only one of many steps towards the final switchover.
For now, the crypto community should be content with the improved user experience introduced by the new network change. On the other hand, miners must try to make do with "inclusion fee" as their only source of revenue.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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