Crypto Long & Short: Why Ethereum’s ‘London’ Upgrade Matters

Crypto Long & Short: Why Ethereum’s ‘London’ Upgrade Matters

In T-minus 10 days, the Ethereum blockchain will undergo its 11th backward-incompatible upgrade, also called a “hard fork.” This hard fork, dubbed “London,” contains five Ethereum Improvement Proposals (EIPs), each featuring code changes aimed at optimizing and improving the world’s second-largest cryptocurrency by market capitalization.

Of these five EIPs, EIP 1559 has been the most controversial among Ethereum stakeholders due to its radical redesign of the network’s fee market. Today’s Briefing features an edited excerpt from CoinDesk Research’s latest report, The Investment Implications of EIP 1559, that explains the risks and reward dynamics of this code change for investors.

This column originally appeared in Crypto Long & Short, CoinDesk’s weekly newsletter featuring insights, news and analysis for the professional investor.

Rewards of EIP 1559

One of the most common arguments against ether (ETH) as a store of value is its unbounded coin supply.

Bitcoin, the world’s first cryptocurrency, has a prescribed and capped supply schedule that fuels an important part of its narrative with investors as “digital gold.”

While EIP 1559 does not introduce a bitcoin-like supply cap on ETH, it does activate a mechanism to curb total supply growth over time by taking a variable amount of ETH out of circulation each time a transaction is executed.

Simulations of EIP 1559 as of June 8 suggest the activation of EIP 1559 over the trailing 365 days would have burned a total of 2,967,937 ETH for a net reduction of 76% in ether supply growth over that period.

In addition to creating a bitcoin-like narrative of limited supply to ETH, EIP 1559 is expected to improve transaction wait times and remove fee-market uncertainty that damp developer and user adoption of dapps.

Finally, EIP 1559 is expected to solidify ether’s role as a form of payment for using Ethereum’s computing resources and interacting with the network’s broad system of dapps by requiring payments of transaction fees on the network to be exclusively paid in the network’s native cryptocurrency.

Risks of EIP 1559

Any technology upgrade comes with risk, and the most salient risk posed by EIP 1559 comes with its proposed changes to reward dynamics and payouts to miners, who face reduced earnings for their work with the activation of EIP 1559. Instead of pocketing 100% of transaction fees, miners will only receive tips from users through an optional “inclusion fee,” paid electively by users seeking priority for their transactions.

Changing reward dynamics on its own won’t affect Ethereum’s ability to process blocks or computations. There is the potential, however, for disgruntled miners to leave the network, sabotage it or start a competing chain. If a large share of Ethereum miners exit or revolt, block times and network security would be negatively affected.

As for users and dapp developers, the benefits of EIP 1559 may not prove to be as efficient in practice as they are in theory. A failure to deliver promised fee-market efficiencies could result in user and developer disillusionment. If that occurs, Ethereum competitors such as Binance Smart Chain and Cardano, the two largest smart contract blockchain platforms by market capitalization after Ethereum at time of writing, will undoubtedly seize an opportunity to grab market share.

To gauge the subsequent rewards of EIP 1559 and its impact on users over the long term after activation, investors can view in real time the number of transactions styled in accordance to the EIP 1559 format as a way of tracking its usefulness in practice through privately maintained nodes or public block explorers.

Finally, the activation of EIP 1559 poses the risk of unforeseen bugs or malicious user behavior. A few have already been discovered during the process of testing EIP 1559 on public and private test networks.

What’s the ’10-year value proposition’ of Ethereum

According to the crypto app tracker, State of Dapps, more than 3000 decentralized apps operate on the Ethereum Blockchain. Apart from being the 2nd largest crypto, Ethereum is also the first platform to facilitate the creation of Dapps.

Meanwhile, DeFi Pulse, the website that publishes DeFi analytics and rankings, classified DeFi apps based on the value of ETH locked in them. Needless to say, several promising projects are built on the Ethereum platform.

Can other tokens challenge or even surpass ETH?

The same was the topic of discussion in a recent survey, wherein 42 experts were surveyed to understand the common perception or narrative tied to ETH.

The first aspect of the survey saw possibilities of ETH retaining its DeFi dominance in the longer run. Here’s what the panelists voted: More than half, around 56% of the experts vouched for ETH to retain its DeFi dominance in the long run. While around 17% portrayed completely opposite views that ETH will eventually lose its dominance, over a quarter (27%) of them are uncertain.

Which tokens make the list of contenders

The aforementioned poll also looked at possible coins worthy enough to challenge ETH, or even surpass it. Out of the lot, around 15% voted for Solana, while 10% for Polkadot, 8% Cardano, and 3% Tezos. However, the majority (51%) expressed their unconditional support for ETH by voting that no coin will overthrow ETH.

CoinGecko cofounder, Bobby Ong said:

“Many of the other chains are looking to just be ETH killers. There needs to be a stronger proposition than just trying to beat a Layer 1 solution by being cheaper and faster because Ethereum will solve these problems soon too. Other Layer 1 chains would have to find unique use cases to stand a chance at succeeding.”

Sell, hold, or buy?

The second aspect covered an important survey on panelists’ sentiments on the coin, i.e. whether to sell, HODL, or buy ETH?

Around 63% opted to buy and 26% said they would HODL. According to the former group, now was the right time to add ETH to investment portfolios, whereas the latter preferred to HODL their ETH positions. However, the others wanted to short their ETH standings.

Banz Capital CEO John Iadeluca wanted to HODL his ETH. He stated,

“While the rate of growth in Ethereum’s price will begin to slow, its 10-year value proposition will continue to grow steadily, despite necessary periods of decline,” he opined.

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Ethereum is one of the biggest digital currencies out there, second only to bitcoin. ETH has long been hailed to be the next big thing in cryptocurrency, with one leaked report from banking giant Goldman Sachs suggesting it will soon overtake bitcoin to become the dominant figure in the market. The price of ethereum right now stands at £1,587.95, up 2.28 percent in the last 24 hours and with a market cap of £185.52billion, according to Coin Desk at the time of writing on July 25.

And according to one expert, ethereum could just keep growing and growing as the years go on.

CEO and co-founder of Voyager Digital, Steve Ehrlich told Express.co.uk: “There is significant long term value of ethereum as its use-cases include banking, real estate, finance, collectibles and more.

“Given its increasing functionality, ethereum will continue to grow exponentially and has promising upsides in the next two to five years.”

Mr Ehrlich isn’t the only one who’s tipping ethereum for big growth in the next few years.

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