MEXC Exchange Research：How important is the impact of the London upgrade on Ethereum? Will ETH deflate?

 

On June 24, the Ethereum development team started the London upgrade. The upgrade started in Ropsten at a block height of 10499401. This is an upgrade that is up next after Berlin.

The upgrade includes the following EIPs:

EIP-1559: Changs in ETH 1.0 Fees

EIP-3198: BASEFEE opcode

EIP-3529: Reduction in refunds

EIP-3541: Reject new contracts starting with the 0xEF byte

EIP-3554: Difficulty Bomb Delayed until December 1, 2021

It has attracted this much attention because the booming DeFi field urgently needs to solve the issue of high gas costs before ETH 2.0. EIP-1559 offers solutions to the pricing mechanism of ETH network transactions, including cost structure design and flexible block design.

The proposal also includes a transitional plan, in which half of the blocks will retain their original bidding mechanism and the other half will adopt a new fee mechanism. The first half will gradually transition to the new mechanism when it comes into effect.

The implementation of EIP-1559 will introduce a “base fee” to blocks on the network, which will track prices of the gas, that the network will accept from transactions, based on the demand for block space.

Specific changes brought about by EIP-1559 include:

1. Cost Structure: EIP-1559 sets the cost structure as Base Fee + Tip.

2. Base Fee: Must be paid with ETH, miners cannot get this and it will be burned.

3. Tips: Part of the reward available to miners that is paid in cryptocurrencies other than ETH.

4. Miners’ Profit: Tip + New Block Rewards

5. Dynamic Block Design: The block can be temporarily enlarged and the adjustment of the base fee is dynamic.

The base fee of each block is fixed, but it can be adjusted according to the gas used in the previous block and the target gas. When the block gas is higher than the target gas price, the base fee increases. When the block gas is below the target gas price, the base fee decreases.

At present, the average gas fee of the Ethernet network is about 30 wei, which is much lower than 350 wei in mid-May. However, as ConsenSys, the Ethereum Software Solution Provider, has demonstrated, the London Hard Fork and EIP-1559 will not result in a significant reduction in gas costs, explaining that EIP-1559 is not intended to reduce gas prices. Still, because of the cost predictability, it may result in lower gas costs, thereby ensuring that users pay less for gas.

Tim Beiko said in a recent blog post that:

“The Ropsten miners and Goerli/Rinkeby validators need to double their gas limit because once the London hard fork comes online, the block size will double and EIP-1559 will keep the block space at about 50 percent.”

For example, if you were a Ropsten miner before the London hard fork and your target block size was 8 million gas, you would now need to set your target to the 16 million gas limit to keep the average number of transactions for each block the same. If you do not change the target gas limit, you will start to reduce the network’s block size.

Another interesting point is that EIP-1559 can cause some transaction costs to be burned. This will cause ETH to deflate to some extent.

Burnt ETH can now be tracked in real-time in WatchTheBurn, and the burnt ETH will be transferred to a black hole address without a private key, meaning that no one can control it.

More than 80,000 ETHs were burned by the Ropsten Testing Network in Ethereum in just 24 hours on the day of the London upgrade (note: only the testing currency of the Ropsten Testing Network was burned).

How many ETHs will be burned each day when the main Ethernet network is online? The data from the Ropsten test network should not be taken as a reference.

Justin Drake, an Ethereum 2.0 researcher, analyzed that when the daily transaction cost of the network reaches 3000ETH, the new ETH issued by PoS will offset the burned ETH. At this time, the total amount of Ethereum does not change, but ETH will experience deflation above this number. For example, when the average daily network transaction cost reaches 9000ETH, the total ETH will decrease by 1.3% per year. And below 3000ETH, ETH will continue to inflate.

Under the EIP-1559 proposal, the number of ETH burnt depends on the total transaction volume of the ETH network. When the new ETH issuance is less than the number of burnt, ETH will deflate, and when the situation is reversed, inflation will continue. But even with inflation, it is indisputable that burning ETH under the EIP-1559 proposal will reduce the inflation rate of ETH.

This article believes that the burning of ETH is not entirely dependent on the bull/bear market. Even in the bull market, Ethereum’s DeFi ecosystem is still going strong, because there is no public chain that can completely replace or surpass Ethereum at present.

However, as a settlement layer, how much can ETH’s total transactions decrease in a certain period? Even if the EIP-1559 proposal does lower individual packing charges for miners, the lower gas fees will only make more people willing to use Ethereum.

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