Ethereum Update EIP-1559
Ethereum Update EIP-1559
- Ethereum is the biggest smart-contract platform at the moment and is heading to the update Ethereum 2.0! The goal is high scalability for the network which should be archived by the change of the consensus algorithm to Proof of Stake. One of the advantages of Proof of Stake is an environmentally friendly consensus mechanism. This is a huge topic at the moment in the crypto industry. Before reaching Ethereum 2.0 there is another update, called EIP-1559. Probably it should be implemented this summer.
But why is the update EIP-1559 so important?
- The power of EIP-1559 lies in two major changes:
- 1. Paying fewer gas fees + better prediction of the gas fees
- 2. Deflationary token structure
Gas fees prediction
- At the moment a lot of Ethereum users overpay for transactions due to the auction mechanism that determines the gas fee. Another challenge are front-running bots which try to find arbitrage opportunities by over-bidding each other and with that push gas fees. This is one of the reasons why gas prices are so high.
EIP-1559 and the new basefee
- A huge change will be the integration of a basefee. If you use this base fee your transaction is almost guaranteed to be included in the next block. But the basefee is not always at a fixed price. The basefee changes depending on the usage of the Ethereum users. As more people use the Ethereum network, the base fee will increase. But the prediction of the gas fee can be better calculated and it is better predictable to get included into the next block.
Ether is getting more scarce
- An important information when it comes to Ethereum is that there is noch capped token supply, meaning it is inflationary. Inflation is not necessarily bad, inflation is needed to incentivize the miners to secure the protocol. Miners earn a fee by participating in the consensus algorithm.
- But how is Ether getting deflationary?
- After the EIP-1559 changes the base fees in every transaction are burnt. That means Ether is inclationary and deflationary at the same time. But the deflationary part is new and so the supply should be reduced and that is always positive for the price, at least in the long run.
- With the EIP-1559 update the ground structure of Ethereum will change and it will become a more deflationary different asset. Moreover the gas fees will be more predictable and that is a big advantage for all Etherum users. The goal of high scalability is coming closer. Specially for the DeFi users the usage of Ethereum is getting more attractive again.
- For most of the DeFi applications you need Ether and it will become the gasoline of the decentralized financial system of tomorrow.
- And due to EIP-1559, it is getting more scarce from day to day.