Ethereum Burns 36% of New Coin Issuance Over 2 Days
Since the activation of Ethereum Improvement Proposal (EIP) 1559, the network has removed from circulation, or “burned,” over 5,000 ETH, worth roughly $14 million. This represents 36% of total new coin issuance over the same time period.
Average fees on Ethereum have increased slightly since the upgrade went live on Thursday at 12:33 (UTC), rising from 0.003 ETH to 0.005 ETH. In addition block sizes, measured on Ethereum in units of gas, have been trending as anticipated toward the block gas target of 15 million gas.
At first glance, EIP 1559 seems to be working effectively, burning fees and pricing block space on Ethereum dynamically so that block sizes on average hit a healthy target. However, upon closer examination, there is evidence that EIP 1559 may not be so effective in its main aim to make fees on the network more predictable for users.
Block size variation
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Under EIP 1559, blocks being mined on Ethereum oscillate dramatically from being 100% full to empty. The reason for this, according to Tim Beiko, thechair of the bi-weekly All Core Developers meeting, is because the pool of transactions eligible to be included in a block gets smaller and larger depending on the minimum fee, or “base fee,” decided by the network.
“Say you have a block that raises the base fee because it’s full,” said Beiko in an interview with CoinDesk. “It’s possible that by the time the next block shows up, there’s just not been that many new transactions who are willing to pay this higher price.”
Pseudonymous Ethereum user “Face Shaver” called this a “misalignment of incentives” that can lead to a number of problems, first and foremost being a lack of fee predictability and stability for the average user.
“It’s not that easy for the average user to predict what the fee will be for the next one or two minutes,” said Shaver in an interview with CoinDesk. “If you are [trying] to get in, either in this block or the next block, the most [fee] volatility you face is ⅛ of the current base fee, but if you think of the average user as someone who is price sensitive, and so is willing to wait one, or even something like three minutes for their transaction to go through … then you have to consider what happens to the fee in next three minutes.”
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Anticipating what the optimal transaction fee on Ethereum will be in three minutes or more is just as difficult with EIP 1559 as it was before EIP 1559, according to Shaver and Beiko. EIP 1559 helps price transactions for users in the moment, but it does not help users predict or anticipate what fees will be in the next moment because the supply and demand dynamics for block space fluctuate with each block.
According to Beiko, such oscillations impacting block sizes and base fees were always expected from EIP 1559. However, Beiko argues the average user can still benefit from knowing the optimized base fee of sending a transaction on Ethereum in the moment, without having to guess or anticipate fees of future blocks.
Incentivizing volatility and Ethereum burns
Savvy users will be careful not to spend more in fees than absolutely necessary.
If users are confident that fees will increase during the next block, there is a financial incentive to include more transactions in the current block than the next. However, if users are confident that fees will decrease during the next block, there is a financial incentive to include more transactions in the next block than the current one.
These natural oscillations between heavy and light blocks, according to Mojtaba Tefagh, assistant professor at Sharif University of Technology, may mean the amount of gas used in each block will trend over the long term above the block gas target, which can create difficulties for network node operators responsible for propagating and maintaining transaction data.
“If the variability in block size is high, people can send more transactions, on average. So if you just adapt the extreme oscillation of alternating between a full block and also an empty block, you can spend much more gas than the target and still the [base fee] would not go up,” said Tefagh in an interview with CoinDesk. “We are incentivizing people to create volatility and as they create volatility, we let them spend more gas.”
For now, both developers and researchers like Moj are taking a wait-and-see approach to assess the full impacts of EIP 1559 on the usability of Ethereum for users and dapps.
According to blockchain analytics firm Dune Analytics, over 90% of transactions on Ethereum have not leveraged the benefits of EIP 1559 two days into the upgrade’s activation.
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Ethereum likely to enter consolidation soon; what should be your investment strategy
The most awaited massive ‘Ethereum London Hard Fork’ update went live on Thursday evening. It is expected to make significant changes to Ethereum’s transaction fee system and fix the problem of scalability to a great extent.
Over time, the average fee paid by Ethereum users had become too costly for small transactions. For an instance, if the network fee is around $20 (USD), sending $20 worth of Ether (ETH) or another digital asset is not worth it, says a report by academy.Binance.com. The high fees made the network less attractive.
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Previously, users entered a bid to pay their gas fees. Miners would prioritise transactions based on the fee added and use the fee as a reward for adding it to a block. Now, each block will have a fixed, associated fee instead, explains the Binance report.
The problem of scalability is another major challenge for the world’s second-largest cryptocurrency network. As per experts, currently, the world’s second-largest crypto network can manage up to around 15 transactions per second. Ethereum’s London update is expected to enable the network to handle many more transactions per second.
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The massive upgrade to the Ethereum blockchain is a huge positive for the ETH token, say crypto experts. Ethereum has already witnessed a rally as it shot up approximately 40 per cent from the recent lows. In the last 24 hours, it is up by 4 per cent. Ethereum price has surged by over 20 per cent in the last seven days.
While the investors and the industry are excited about the upgrade, experts expect ETH to enter a consolidation phase soon. “ETH had an almost vertical price rise, and this eventually subsided. ETH is likely to enter a consolidation, which would be a great time to accumulate more,” says Edul Patel, CEO & Co-founder, Mudrex. “Buy on dips is a worthy strategy in Ethereum,” he adds.
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However, Patel believes we are still far away from the previous all-time high in Ethereum, hence a prudent strategy for all long-term investors would be to hold on to their ETH holdings now.
In May, Ethereum reached its all-time high price of $4,360. Going by the current market price, it is still 35 per cent down from the highest levels. While there is a lot of potentials for ETH to rally from the current levels, industry experts believe the timeline for this rally to occur can range from medium-term to long-term. Edul Patel cautions investors against buying more at this time. He says, “Markets are fired up, and this might not be a good time to buy more.”
Also read: Bitcoin price falls 4% from recent highs, breaches $40,000 level
Ethereum just activated a major change called the ‘London hard fork’ — here’s why it’s a big deal
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Ethereum’s much-hyped and somewhat controversial “London” hard fork has just activated. So far, news of the successful upgrade has coincided with a runup in the price of ether, the native token of ethereum’s blockchain. The cryptocurrency is at $2,620, up 3.9% in the last 24 hours. A big part of the enthusiasm has to do with the fact that the software upgrade means a few big — and necessary — changes are coming to the code underpinning the world’s second-biggest cryptocurrency. It has always been a tough go for ethereum users. The blockchain has a long-standing problem with scaling, and its highly unpredictable and sometimes exorbitant transaction fees can annoy even its biggest fans. The problem has become worse in recent months thanks to a surge in interest in nonfungible tokens, which are mostly built on ethereum’s blockchain, as well as an explosive growth in the world of decentralized finance, or DeFi, which also largely uses the ethereum blockchain. Thursday’s changes to the code, which has little to do with the city of London, are designed to fix many of these issues by destroying or “burning” ether coins and changing the way transaction fees work so that they are more predictable. If you think of ethereum like a highway, London is adding a few lanes to tamp down traffic and is standardizing toll prices. “It adds a lot of complexity to the fee logic, but it’s an interesting approach that could potentially stabilize the fee dynamics,” said Nic Carter, Castle Island Ventures general partner and Coin Metrics co-founder.
Making fees more predictable
Even though the ethereum blockchain gets makeovers all the time — for those keeping track, this marks hard fork #11 — the “London” upgrade is a game changer, according to experts. The hard fork itself consists of five Ethereum Improvement Proposals. They are called EIPs for short, and each puts forth a set of changes to the code. The one that everyone is latching onto is EIP-1559. Before the upgrade, users would essentially participate in an open auction every block, where they would have to place a bid with a miner in something referred to as a “first-price auction.” The closed-bid setting meant that users were often taking a stab in the dark when proposing transaction fees (known as “gas prices”), picking a number that they felt would guarantee their inclusion in the next block of transactions.
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Some users who felt the need to prioritize their transaction would offer to pay a premium above their bid to try to gain preferred status within the block itself. “Fifteen-fifty-nine is really meant to create an ecosystem that encourages lower gas fees,” said Auston Bunsen, co-founder and CTO of QuikNode, which provides blockchain infrastructure to developers and companies. “Sometimes people are willing to pay a lot to get into a block. Fifteen-fifty-nine seeks to remediate this issue by creating a base fee,” continued Bunsen. Rather than holding a blind auction every block to determine the gas price, ethereum’s protocol will algorithmically decide the transaction fee based upon overall demand on the network.
Having the protocol decide a uniform gas price should prevent major spikes in prices, although that doesn’t necessarily mean it will be cheaper for buyers. It is, in essence, one big hedge against the market falling totally out of whack. However, the upgrade will still allow for users to jump the queue by tipping. But a bigger change fomented by EIP-1559 is a doubling of the block size. While in theory, this means that twice the number of transactions can happen in each block, the upgrade has actually been designed so that the protocol only wants the block to be half full. This is meant to help smooth out spikes in demand, helping gas fees to stay stable. Matt Hougan, Bitwise Asset Management’s chief investment officer, uses the metaphor of a ferry boat to explain the design logic.
If the ferry operators have set the price of a ticket too low, they may need all that extra seat capacity to accommodate the passengers standing on the dock who want to hop on board at the base ticket fee. “But the price ratchets up very quickly, and algorithmically, to the point where you should get to a clearing price that allows the block to be at its target of half full, and certainly that allows all the transactions that want to go through to be processed,” Hougan explained. Making the block size dynamic so that it can accommodate fluctuations in demand is what ultimately stabilizes the base fee. “It sounds pretty simple, but it’s a really elegant design solution to a problem that has plagued ethereum since its inception,” he said.
The ticking time bomb