Its main problem is PoW (Proof of Work Mechanism), which makes transactions slow and expensive.
The Ethereum developers realized that the new L1s are providing faster and more convenient networks and moved towards the Ethereum 2.0 upgrade with four hard forks in 2021 in preparation for the replacement of PoW with PoS (Proof of Stake).
These forks were:
- April: Berlin update
- August: London update
- October: Beacon Chain Altair update
- December: Arrow Glacier Update
Of the four, the London update has received the most attention, mainly because it affects everyone: users, holders, miners, and developers.
Footprint analysis analyzed this improvement in Who benefits from EIP-1559? in August. In addition to smoothing out gas rate changes by allowing variable block sizes, splitting the gas rate into base rate and priority rate, and depleting the base rate, the London update will likely allow ETH to continue to increase in value by making it deflationary. , among other benefits. .
London update changes
The main effects of this update are:
- More stable and predictable gas rates: With a base rate price based on previous block usage, it can vary between blocks by up to 12.5%, making it easy for users to accurately predict how much gas they will spend. Keep in mind that this does not necessarily mean lower gas rates.
- Miners will lose revenue: After the upgrade, miners will no longer get the full gas rate as before, but only a part of the priority rate. Future earnings will also primarily depend on block rewards.
- The ecosystem will start burning ETH: Ethereum has launched a burning mechanism that causes inflation to slow down rapidly. This change is likely to link the value of ETH to the value of network usage.
As of December 31, five months after the launch of the burn mechanism, 1,317,700 ETH has been burned, with approximately 6.22 ETH burned per minute and 1.43 ETH per block.
The number of users choosing EIP-1559 as their transaction type is also gradually increasing, from 50% at first to 70%, and on average around 10,000 ETH will be burned per day.
While the London update does not revise the network experience or lower fees, it sets the stage for Ethereum 2.0. By delaying the difficulty bomb, a mechanism to force PoW to stop producing blocks, it ensures that miners can still earn income without “going on strike” under the PoW mechanism until the Beacon chain is ready to implement PoS.
How does the London update make ETH deflationary?
The London update was the first step in making ETH deflationary, and the expansion of Ethereum 2.0 and Layer 2 will continue this effort. The Ethereum mainnet will complete the merger with the Beacon chain in 2022. After the upgrade, PoW will become the PoS mechanism, while the block structure will change from single chain to multi-chain fragmentation.
The PoS mechanism allows for better energy efficiency and higher capacity. The TPS in Ethereum 2.0 could reach 2,000 to 3,000 and eventually 100,000 TPS, solving the current congestion problem.
The PoW mechanism will be phased out, which means that mining, as was done until then, will become a thing of the past and only new incremental problems will be issued through the PoS mechanism from 400,000 to 700,000 per year. After the London update, at the current consumption rate of around 10,000 ETH per day, around 3.65 million ETH will be burned each year, far more than the number of incremental problems.
In 2021, we saw the price of ETH rise from $ 738 at the beginning of the year to $ 4182 in May. After a big drop in the price of the cryptocurrency, the price of ETH gradually warmed up, peaking at $ 4826 for the year in November. While this was driven by project growth during DeFi’s summer, the reduced inflation rate after the London upgrade played a role as well.
Following the launch of Ethereum 2.0 in December 2020, the mining rewards were gradually reduced. Tim Beiko, the developer of Ethereum, expects the merger of Ethereum 1.0 and 2.0 in April or May 2022, after which Ethereum 1.0 will likely disappear and eventually be abandoned. With the advent of the PoS mechanism, Ethereum 1.0’s PoW mechanism will go down in history and ETH deflation is coming soon. For those who are bullish on Ethereum, 2022 may be an “ETH Summer” to look forward to.
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Date and author: January 12, 2022, [email protected]
Data source: Ethereum Dashboard of Footprint Analysis
This article is part of our Year in Review series.
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