The ethereum upgrade that will destroy coins is happening August 5. Here are 4 things you need to know.

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Dado Ruvic/Reuters

A major ethereum network upgrade, codenamed EIP-1559, is due on Thursday.

The change has excited some investors, as it will start to destroy or “burn” ether coins.

Insider breaks down four things you need to know about the upgrade.

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A hotly anticipated upgrade is coming to the ethereum network on Thursday that will change the way transaction fees work and start to destroy coins. It had been scheduled for August 4 but was delayed slightly.

The change is technically known as Ethereum Improvement Protocol 1559, or EIP-1559, and will be included in a network upgrade called the “London hard fork.”

Here are four key things you need to know.

EIP-1559 aims to make transaction fees more predictable

The change to ethereum is all about making transaction fees more predictable, therefore making the network easier to use.

Fees are highly volatile, in large part because the network uses an auction system. Users bid against each other to have their transactions processed and verified by other users, called miners.

Transaction fees can soar when the network is busy. But the main problem, as developers see it, is that the blind auction system makes fees highly volatile and unpredictable.

After EIP-1559, users will pay a “base fee,” which will be algorithmically determined by the network depending on how busy it is, instead of submitting bids. They will also be able to pay a miner a “tip” to have their transaction processed sooner.

The idea is that the network’s base fee will always be clear to users as they go into transactions and won’t jump around from one minute to the next. If it’s too high, users can wait until it’s lower.

Read more: The head of research at a crypto firm who called bitcoin’s surge to $60,000 last year breaks down why it will reach $250,000 by 2025 - and shares 2 altcoins that could go up 20 times

It will destroy coins - and may boost ether

EIP-1559 has excited people because it will destroy or “burn” ether - the cryptocurrency of the network.

Miners do not receive the base fee; otherwise, they could artificially congest the network to keep the fee high. It’s destroyed instead.

Some investors believe the fact that the supply of ether will be limited by burning could cause explosive price growth.

But the influence on price is far from certain, developers say. It also depends on things like transaction volumes, which determine how big gas fees are and so how much ether is destroyed.

“Until it’s deployed, we don’t know exactly what the effect will be in terms of ether burned,” Ben Edgington, an ethereum developer at ConsenSys, said.

Transaction fees won’t necessarily be cheaper

Transaction fees on the ethereum network may fall because a more predictable base fee is likely to help users overpay less often than under the highest-bidder-wins system.

But EIP-1559 does not aim to reduce transaction fees - only to make them more predictable. The base fee itself will vary, going up when the network is busier and down when things are calmer.

Bigger changes are coming to the ethereum network

EIP-1559 is small compared with ethereum 2.0 - an overhaul of the network’s entire infrastructure that developers hope will be complete by early 2022.

Ethereum 2.0 will see the network change from a “proof-of-work” system to a “proof-of-stake” system. Under proof of work, miners use vast amounts of computing power to verify transactions. But under proof of stake, users will put forward ether to gain the right to verify transactions and earn coins.

Developers are also working on scaling up the ethereum network by adding more side networks and linking them. Ethereum insiders hope this will reduce congestion and transaction costs.

Ether Prints Record Winning Streak as London Hard Fork Looms

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Ether looks to extend its record daily winning streak in the runup to a planned upgrade on Ethereum’s blockchain that could significantly reduce the cryptocurrency’s supply growth.

The second-largest cryptocurrency by market cap was trading 1.6% higher on the day near $2,600 at press time, having rallied 43% over an unbroken string of 12 straight daily price gains, according to Coinbase data.

“Ether has notched a 12-day winning streak, the longest ever,” blockchain analytics firm IntoTheBlock tweeted early today, citing $2,598 and $2,753 as key resistance levels on the path toward $3,000.

ETH daily chart Source: TradingView

Aside from bitcoin’s price recovery from $30,000, ether may have received a boost from Ethereum’s upcoming 11th backward-incompatible upgrade, or hard fork, slated to happen on Aug. 4.

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The so-called London hard fork contains four Ethereum Improvement Proposals (EIP), of which EIP-1559 will activate a mechanism that would burn a portion of fees paid to miners. Once it takes effect, increased network usage will result in a higher amount of ETH being burned, thereby curbing the cryptocurrency’s supply growth over time.

The upgrade may bring ether a store-of-value or deflationary-asset appeal in the eyes of some investors – a narrative so far largely focused on bitcoin. The top cryptocurrency’s supply is capped at 21 million, and its per-block issuance is reduced by 50% every four years.

Under simulations run by Dune Analytics, the upgrade would have burned more than 2.9 million coins in 365 days if implemented a year ago, amounting to over 70% net reduction in supply growth.

“The highly anticipated Ethereum London hard fork event will expose users to a more flexible and cheaper fee structure and introduce a mild burn effect, billed to make ether deflationary,” Greg Waisman, co-founder and COO at the global payment network Mercuryo, said. “The coin has trailed an uptrend from the weekend, and we may see this brewing positive sentiment over the coin shoot its price to $3,000 in the coming days/weeks following the update.”

Options data shows investors are positioning for continued gains. Both long-term and short-term put-call skews are flashing negative values for the first time in nearly three months. That’s a sign of greater demand for calls or bullish bets relative to puts.

One-week, one-, three- and six-month put-call skews hover below zero, an across-the-board bullish market positioning last observed in early May.

Ethereum’s London hard fork is expected to arrive on Thursday, ushering in EIP-1559

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Ethereum’s London upgrade is set to activate on Thursday, according to the countdown available on Ethereum.org. “The London upgrade is scheduled to go live on Ethereum in August 2021, on block 12,965,000,” Ethereum.org reads. “It will introduce EIP-1559, which reforms the transaction fee market, along with changes to how gas refunds are handled and the Ice Age schedule.”

Ethereum Improvement Proposal 1559, or EIP-1559, will directly affect how the network handles transaction fees. Going forward, each transaction will burn a base fee, thereby decreasing the asset’s circulating supply and giving users the option of including a tip to help incentivize speedier confirmations proportionate to network demand. The London fork will also introduce other EIPs, such as EIP-3541, according to a blog post from the Ethereum Foundation in mid-July.

Twitter user korpi pointed out a number of notable points regarding EIP-1559 in a tweet thread on Monday.

EIP-1559 is scheduled to go live this week and I still see a lot of wrong takes on its impact. Remember:

Why? — korpi (@korpi87) August 2, 2021

“What everyone is excited about is $ETH burn,” korpi said in the tweet thread after discussing a number of other points regarding the Ethereum upgrade. Korpi added:

“After EIP-1559, part of the transaction fee is burned and removed from circulation. But it doesn’t mean that ETH immediately becomes a deflationary asset. For that to happen, ETH burned must be higher than ETH issued in block rewards.”

Ethereum’s London hard fork is part of its Ethereum 2.0 journey — which will ultimately change the network’s consensus algorithm from proof-of-work, or PoW, to proof-of-stake, or PoS.