EIP 1559: Why ETH Could Explode if Gas Prices Drop
Ethereum, the global decentralized network powered by its own currency (ETH), is a victim of its own success in many ways. It has become the backbone of a huge ecosystem of thousands of DAPPS with billions being moved in stablecoins every day.
Many acknowledge that Ethereum has the potential to be the foundation of an entirely new, globalized financial system if crypto and DeFi go mainstream. As we all know, Ethereum could be gargantuan some day.
Today however, it has huge problems.
Ethereum’s Weaknesses: Congestion and Fees
In its current form—Ethereum isn’t scalable. At least, not scalable enough to fulfil its potential.
The boom in DeFi over the past year has laid this bare. Crypto in general had unprecedented adoption through 2020, and Ethereum was no exception. As the number of DeFi power users grew, and more and more crypto assets were shifted around chasing the highest yields, the Ethereum blockchain groaned under such pressure.
Doing anything became either extremely slow or extremely expensive.
Gas – the supply and demand driven fee that users pay to miners for processing their transactions – became extortionate, often totalling more than the transaction amount itself.
A Tough February for Ethereum Users
Any platform that people have to pay hundreds of dollars to use is not going to replace anything, let alone the world’s financial system. People were discouraged, FUD ensued.
These UX failures opened the door further to competitors to move in on the throne. Binance Smart Chain even started processing 70% more daily transactions by mid February.
People have been spreading FUD about Ethereum for a long while for this very reason, were they finally being vindicated? Was this the end of the road?
Not by a long way. Not only does Ethereum have a legitimate shot at overcoming its limitations and evolve to fulfil its potential, but the price of ETH could go through the roof this cycle. Let’s see why.
EIP 1559 to the Rescue?
Luckily the amount of brains and technical talent in the Ethereum community is mind-blowing. There are plans and initiatives in the works to take the platform to the next level.
One of those is Ethereum Improvement Protocol (EIP) 1559, which was recently approved and will be fully implemented in July. EIP 1559 should cut down crazy gas fees, help with scalability, and make ETH more of a deflationary asset at the same time.
What Exactly is EIP 1559?
The upgrade is scheduled to be packaged with the London hard fork this July, 2021.
Essentially, the goal is to improve several problems with Ethereum’s current user experience. Instead of sending the gas fee directly to the miner, the fee will now be sent to the network itself with an optional tip paid to the miner.
The new “basefees” will be algorithmically set and theoretically more stable and fair. Fees will be calculated based on whether the current block is over 50% full (higher fee) or below 50% full (lower fee).
EIP 1559 has several other interesting facets – but the most important UX benefits are significantly improving usability, making transaction fees more predictable, and making transactions faster.
At this time, it seems that the EIP 1559 upgrade is going ahead regardless.
How Will EIP 1559 Affect the Price of ETH?
The war between miners and developers has been one of the causes of a mediocre month for ETH’s price.
Now that the issue is somewhat settled though – what’s the outlook?
Depending on how the team pulls it off, the ETH price could go through the roof. The improved user experience and more predictable fees will theoretically drive adoption by users.
The spike likely to follow successful implementation combined with the generally bullish trend could mean rapid growth with an $8000 – $1000 ETH potentially on the cards.
There’s another key facet of EIP 1559 that could help this to happen. Not only will the fee be sent to the network itself, but a significant portion of it will be burned – permanently destroyed – once they have been used in the transaction.
This is a huge step. Previously the supply of ETH was theoretically infinite – in sharp contrast to its big brother Bitcoin. Now though ETH could become a deflationary asset, making it more attractive as a long term store of value if the mother platform’s status looks to remain secure.
The team themselves strongly hinted that this was bullish for price.
There are a lot of unknowns still though. Will they deliver? Due in part to its decentralized nature, things tend to move slowly and deadlines get extended again and again when it comes to Ethereum. They do not have the best track record when it comes to hitting milestones on schedule.
This is always a possibility and should figure into your investment and trading decisions.
Since a lot of people embrace the “buy the rumor sell the news” philosophy though, we’re likely to see serious action over the next few months – and the commentators predicting a $10k ETH for the end of 2021 may well have their day.
In the long run though, to become truly scalable and world-eating, the fabled Ethereum 2.0 will need to finally come to fruition – and L2s will need to really mature. Will that happen? I wouldn’t want to put a date on it, but my fingers are crossed as hard as yours.
We’re still in the early days of digital assets in general, and several indicators suggest our current bullrun is far from over. 2021 is set to be a crazy year for the space—whether that’s good or bad.
Agree, disagree, got something to say? That’s great. Comment below with your thoughts about gas, EIP 1559, the power struggle between miners and devs – or anything else on your mind!