Blockchain developers on the Ethereum network have approved a proposed change to the network that would ‘burn’ a small amount of Ether (ETH) every time that the currency is used to pay ‘gas fees’ on a transaction. According to Bloomberg, the proposal, known as ‘EIP 1559’, will be bundled into an upgrade in July or August of this year.
Many analysts believe that the reduction in the supply of Ether tokens will lead to higher token prices overall. This is because a reduction in the supply of Ether will make the asset more scarce.
In addition, EIP 1559 is slated to take the guesswork out of Ethereum network transaction fees. Currently, fees on the Ethereum network are so inconsistent that users on the network rely on sites like ETHGasStation to help them determine what their transaction fees will be at any given time.
In July 2020, OKCoin’s Olivia Lovenmark explained to Finance Magnates that: “to date, gas fees have been determined based on an inefficient auction process.”
“EIP 1559 would improve this by making it clear what fees are with an automated system that is comparable to Bitcoin’s difficulty adjustment in the sense that both adjust, based on network volume and usage.”
Indeed, “EIP 1159 proposes a ‘BASEFEE’, which automatically adjusts to the network’s congestion level of transactions, providing a ‘market rate’ instead of users referencing prices paid.”
Tim Beiko, Senior Product Manager at ConsenSys, also told Bloomberg that EIP 1559 will make it so transactions can only be paid for with Ether, a move that will ‘cement Ether’s role in the ecosystem’.
Increased Scarcity of ETH Tokens Could Make the Asset More Valuable
Why is it so significant that EIP 1559 will lead to the destruction of ETH tokens? Analysts say that it is because of increased scarcity.
In the cryptocurrency world, scarcity is described as one of the attributes that make Bitcoin (BTC) suitable for use as a ‘Store of value’ or ‘hedge against inflation’. Before EIP 1559, a number of analysts had concerns about inflation on the Ethereum network, since the supply of ETH was theoretically infinite.
Indeed, Eric Turner, Director of Research at crypto analytics firm, Messari, told Bloomberg that EIP 1559 “is probably one of the biggest milestones we’ve seen recently,” he said. “Now, they’re actually controlling inflation on Ethereum” and “in some cases you’re looking at negative inflation so it’s definitely important.”
Increased scarcity on the Ethereum network could lead to even further price gains for ETH tokens, which have already seen massive growth over the past 12 months. A year ago, the price of ETH was roughly $200; today, that price has increased to $1700, which is an increase of roughly 750 percent. By contrast, the price of Bitcoin has risen roughly 530 percent over the same time period.
Before Its Acceptance, EIP 1559’s Importance for the Future of Ethereum Was Recognized Last Summer
In July 2020, Ari Paul, Co-founder and CIO of BlockTower Capital, tweeted that EIP 1559 was “make or break” for the network.
“My arguments on this aren’t terribly complex but are nuanced enough that I fear individual pieces getting taken out of context, but I’ll give it a shot in brief form,” he wrote.
My arguments on this aren’t terribly complex, but are nuanced enough that I fear individual pieces getting taken out of context, but I’ll give it a shot in brief form. /1
— Ari Paul ⛓️ (@AriDavidPaul) June 27, 2020
“The past couple weeks in DeFi have been a microcosm of bootstrapping network effects in a competitive space. The winner(s) in both DeFi and Ethereum’s L1 competitive space need to be sound as a platform for their value proposition, but after being sound, it’s probably about ‘getting big fast’.”
“Currently, all crypto use cases except maybe ‘digital gold’ are tiny and very leapfroggable. Facebook didn’t need a single Friendster user to succeed. The winning L1 and dApps won’t need a single current user. 7.4 billion people not yet attached.”
Finance Magnates reported earlier today that Ether whales are said to control roughly 70 percent of the supply of ETH tokens.