After the announcement of the EIP-1559 or London update of Ethereum, many users wonder about these improvements’ impact on the platform. Some experts point out that this update could generate a “deflationary pressure” on Ethereum, something similar to what happens with Bitcoin every four years after a halving, where miners’ reward is reduced to 50%.
What is deflation?
Deflation, or negative inflation, is a term used in economics to describe a general decline in the prices of goods and services (over a relatively long period) generated by a decrease in demand and an excess in supply.
Operation before and after the update
Improvement proposal EIP-1559 (London) aims to change how transaction fees (gas fee) are calculated. Before this update, users made offers indicating how much they were willing to pay for the miner to process the Ether transaction, which was sometimes expensive; however, under the new EIP-1559 scheme, this process is handled through An automated bidding system, with a fixed fee that fluctuates according to the level of congestion on the network, this solution is beneficial for occasional Ethereum users, as it generates lower costs and makes the protocol or system “less intimidating” when you first use it.
With the new update, the user who makes a transaction on the Ethereum blockchain will pay a base fee “burned” or “taken out of circulation” instead of going to the miners. The term “burned or burned” means that the cryptocurrencies will be taken out of circulation and sent to an address (of which no one has the key). The reduction in the supply of Ethereum puts a “deflationary pressure” on the network. Although new coins continue to be created with each new block, some ETH disappears as well. In theory, “deflationary pressure” will push prices up because supply growth slows.
With this improvement, the supply of ETH would not be reduced but would be putting “out of circulation,” which generates a process similar to the halving of Bitcoin that occurs every four years, in which miners receive 50% less reward in exchange for processing transactions on the network.
What does the triple halving of Ethereum mean?
Many people are using the term “triple halving” to describe the three changes of Etherum that will occur in a short period, which can have similar effects to the individual halving of Bitcoin; the main changes would be the EIP-1559 update, Ethereum 2.0, and the transition to proof of stake (PoS or Proof of Stake).
Effects in the medium and long term
Each time there is a “burn” of a part of the tariff, there will be fewer Ethers available, which will cause an upward pressure in the price (if demand increases). The developers believe that the effects of London and EIP-1559 will be seen more in the medium and long term rather than the short term. Suppose we add to this the impact of the proof of work protocol (PoW or Proof of Work) to proof of stake (PoS or Proof of Stake) planned for the end of 2021 or the beginning of 2022. In that case, these effects may be more notable and be the moment when all these efforts are reflected in the Ethereum network.
What do you think about this topic? What do you think the impact of this Ethereum update will be?
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