How Updating the Ethereum Network Can Make the Coin Jump

THE Ethereum, second largest network of cryptoactive of the world in market capitalization, underwent a new update in early August. Dubbed the “London Hard Fork” the changes brought five changes to the way the blockchain operates. The main one is the proposal to improve Ethereum 1559 (EIP-1559), which aims to make network rates more stable and cryptoactive deflationary.

Updates happen occasionally and aim to bring improvements to ecosystems. The previous change to Ethereum took place in April 2021 and was called the “Berlin Fork”.

What is the London Hard Fork

“Hard Fork” is a jargon used by developers for incompatible updates to previous versions. In other words, after London, if a developer wants to stay connected to the network, they will need to download this new version. In practice it is like a software update.

In London, five EIPs were implemented, which are the acronym for Ethereum Improvement Proposal, or Ethereum Improvement Proposal, in good Portuguese. Generally speaking, updates generate greater impact for developers, with the exception of EIP 1559, which was developed with the aim of improving the quality of use of network users.

Before we explain what EIP 1559 changes, we need to explain how the network works. Every time you are going to interact with the Ethereum ecosystem, whether to send money to someone or interact with the most diverse decentralized finance (DeFi) applications, such as loans, brokerages or banks, you need to pay a fee in Ether, which is not fixed.

This fee is paid to network miners, who leave their mining devices on 24 hours a day validating all Ethereum transactions. It works as an incentive for these participants to continue performing this task.

Before the upgrade, users themselves could define how much they wanted to pay in fee, which at first glance seems like a great thing, as the user could choose not to pay dearly to make the transactions. But this created a problem: when the network was congested, several transactions were “stuck”, as they did not have a competitive rate.

“Everyone put up an ever-increasing fee to get transactions approved first. As a result, price variations were absurd and, in a matter of an hour, they went from US$ 10 to US$ 200”, says Alex Buelau, CTO of Parfin, a platform for consolidating investments in cryptoactives for institutional clients.

According to the Ethereum Foundation, EIP 1559 establishes two improvements: the first implements a mechanism for creating a base rate that will increase and decrease according to the usability of the network, creating more stable values. The second created a feature for this base fee paid by users to be burned, instead of going to the miners, who will now only receive a kind of tip.

André Franco, cryptocurrency specialist at Empiricus Research, explains that this tip is an extra amount you pay if you want the miner to put your transaction in front of the order.

Impacts on the network

The Ethereum network is the main foundation for decentralized finance (DeFi) applications and also for NFTs, the new technology responsible for bringing authenticity and originality to digital items. As more users and investors use these applications, the more the network tends to become congested, as well as more value being added.

Since the implementation of the Ethereum network’s burning mechanism, more than 62,300 Ether have been destroyed, this is equivalent to approximately R$ 1.016 billion withdrawn from circulation. The information is from the platform, used to explore the network and check transactions and balances.

Orlando Telles, director of research at Mercurius Crypto, explains that rates will now be more stable. “It’s important not to confuse this with cheaper rates, it’s not going to happen anytime soon. In other words, we will not see large rate peaks or moments with very low rates, we will always see something more linear”, he says.

Impact for investors

Unlike Bitcoin, which has a limit of 21 million BTC units to be mined, the Ethereum network does not have this lock. With the implementation of EIP 1559, the possibility has been created that more Ethers will be destroyed than new units will be created.

In other words, the more the Ethereum network is used, the greater the amount of Ethers burned and removed from the market.

“If we consider that the value of the network remains constant, with the reduction in the quantity of that asset, the tendency is for the currency to appreciate”, says Telles.

Franco explains that now, with the update, for sure the amount of new Ethers issued will not be the same as before, even if production has not been affected. “This makes the Ethereum protocol a candidate to be deflationary, unlike Bitcoin, which has a programmed inflation. This deflation can make the asset even more valuable”, he says.

With the burning of ETH, there is a reduction in supply without changing demand. “This reduction ends up pulling the price up. And that’s really what has happened, since the London Fork passed, the price of the Ether has gone up,” says Buelau.

According to information from the Coinmaketcap platform, which analyzes the prices of cryptoactives, this Wednesday (18) at 7:40 pm, the Ether was quoted at US$ 3,031.72, which represents an appreciation of 310.98% this year.

According to information from the Ethereum Foundation, the next update of the Ethereum network, which has the name Altair, is scheduled to go into operation in 2021.