Ether upgrade: Why it matters to investors and everything you need to know

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Ethereum, the second-largest cryptocurrency, has given stupendous returns in the past one year but has often faced issues with respect to the scalability of the blockchain and unpredictable transaction fees. Unlike Bitcoin, which is limited in supply, there is no limit on Ethereum count making it an inflationary cryptocurrency. Miners are rewarded with brand new coins every time they validate a block. They also get paid transaction fees by users. However, last week, an update called ‘The London Upgrade’ or ‘Ethereum Improvement Proposal’ (EIP)- 1559 was deployed with an aim to solve some of the pain points of the currency. For example, miners will no longer receive income from transaction fees, making it more predictable for those, who use this blockchain.

What is ether update?

A set of five EIPs was implemented in this upgrade including the popular EIP-1559. EIP-1559 brings in a change to the market fee mechanism that brings some certainty for transactional costs with a base fee and a variable block reward. The base fee is ‘burnt’ by the blockchain with an aim to make the cryptocurrency deflationary with respect to coin supply.

“This update is a precursor to Ethereum 2.0 that will be rolled out early next year which will move the blockchain to a Proof-of-Stake (PoS) algorithm from the current Proof-of-Work (PoW). PoS will make Ethereum more scalable and solve issues with respect to carbon footprint,” said Vikram Subburaj Co-Founder and CEO of Giottus Cryptocurrency Exchange.

This is an amalgamation towards ETH 2.0, which is expected to happen after the implementation of London hard fork and Ethereum 1.59. “With this, we will witness a lot of new Ethereum being issued. Typically, there are about 7000 blocks that get mined on a daily basis on the Ethereum network. In every block, there are about two ether that were being mined, a lot of which is getting burned up,” said Prashant Singh – Co-founder and CTO – Bitbns.

Impact on Prices

With this update, experts say a change will be witnessed in the overall fee structure or the fees shared among miners as it will get more limited after the development. “Precisely, this is why the miners have not been very excited about this upgrade and are aiming to create a union to wage an attack on Ethereum, but it didn’t work. Overall it will have a net positive impact on Ethereum as the industry will witness a drastic reduction in the issuance that is happening on a daily basis. Right now, issuance in excess of about 40% is getting burned. Therefore, with this update one will witness a further reduction in the total number of Ethereum being issued on a daily basis,” said Singh.

Ethereum’s co-founder Vitalik Buterin believes that this gives confidence for bigger updates in the future. Experts believe post the update investors may park more money in Ethereum and hence, its prices can go higher.

“While EIP-1559 is not designed to lower transaction fees, it gives some certainty to transaction fees at the ‘moment’ and hence may lower the average fees over the medium term. This in turn will help Ethereum investors gain trust in the blockchain. Also, more than 16,500 ETH have been burnt as base fees post the upgrade so far. This will limit Ethereum’s supply in the future and can lead to higher prices basis demand,” said Subburaj.

Impact on other cryptos

Will it have an impact on the prices of other cryptocurrencies such as Matic? “Polygon (MATIC) is a layer 2 solution for Ethereum to help scale the blockchain further – they will remain relevant even after Ethereum 2.0 implementation and hence will grow along with Ethereum,” said Subburaj.

Singn added, “It will have a certain level of impact on the prices of other cryptocurrencies such as Matic. This is primarily because as the Ethereum network grows to become more scalable and the transition from a ‘proof of work’ to a ‘proof of stake’ model, we will witness drastic reduction in carbon emissions from the network going forward. In fact, we might see carbon emissions-reducing by 99% plus for the Ethereum network. In terms of price impact, the other scaling solutions on top of Ethereum network will have an impact. However, I don’t see any significant impact in terms of prices on top of networks like Polygon.”