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How Bullish is ETH Burning in EIP-1559?

How bullish is ETH burning in EIP-1559
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The most recently approved Ethereum Improvement Proposal 1559 (EIP-1559) is one that has garnered a lot of positive attention from the mainstream cryptocurrency community. This is unusual because EIPs do not typically receive much attention outside of the very small Ethereum development community, but EIP-1559 is a little different.

We will offer a brief overview of what exactly EIP-1559 entails, how bullish it is for Ethereum, and the future implications of this EIP. 

What EIP-1559 Entails?

EIP-1559 is a simple EIP, but the changes it brings to Ethereum are huge, which is why it has received much more attention than most EIPs. 

Basically, EIP-1559 will do a few different things to the blockchain. The first, and the one that has received the most attention, is that EIP-1559 will change the miner rewards. In the current version of Ethereum, miners receive 100% of the transaction fee on the Ethereum blockchain. 

Of course, this incentives the miners to mine because they receive a transaction fee in addition to the block reward. 

EIP-1559 changes this because the transaction (gas) fee will be burned, rather than paid to miners, when EIP-1559 goes into effect

That’s right, the transaction fee will be sent to a wallet that does not have an accessible private key – a dead wallet. The Ether used to pay for transactions will be removed from circulation.

Now, that might sound like a big, fundamental change to the Ethereum blockchain. And it is to some level. However, that Ether burn function is not the main priority of EIP-1559. 

The main priority of EIP-1559 is to keep gas prices stable. 

Stable Gas Prices on Ethereum

Ethereum has had a problem with widely fluctuating gas prices since 2017. This problem has arisen as Ethereum experiences popularity that comes in waves more than a steady flow. 

The first big problem with gas spikes came in 2017 when the cryptogame Crypto Kitties brought the Ethereum blockchain to a standstill as users flooded the blockchain to send and receive their customizable cats in the game.

Ethereum also ran into gas problems with certain large initial coin offerings (ICOs) during 2017. Users wanted to ensure that their investment in an ICO went through, so they would pay absurdly high gas fees to make sure a miner picked up their transaction.

Remember, miners want to maximize profits, so a miner will prioritize which transaction to take based on the gas fee. The transactions with the highest fees are done first and those with the lowest fees are done last. 

Anyway, this became a problem in 2017 and Ethereum founder Vitaly Buterin proposed a solution, but the problem quickly ended as the general public lost interest in cryptocurrency due to ICO mania dying down. 

However, this problem has reemerged with a vengeance due to the increasing popularity of decentralized finance (DeFi). For those that don’t know, DeFi is basically the transition of standard, centralized finance onto the blockchain. It includes decentralized cryptocurrency exchanges, lending platforms, sports betting, and more. 

Now, with DeFi translation speeds are critically important as money can be lost if a DeFi transaction does not go through in time, so users are willing to pay extremely high gas fees to ensure a transaction. Not to mention that DeFi has grown so popular on Ethereum that it is beginning to actually slow down the Ethereum blockchain.

To cut a very long story short, Ethereum currently has a maximum limit of 12.5 million gas per block. EIP-1559 will raise that to 25 million gas per block with one caveat.

25 million gas the maximum potential of the block. It is not always the maximum. Basically, the block size will expand during times of congestion or high gas fees to help keep the gas price stable. 

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Of course, there are complicated algorithms and other security features behind this aspect of it, but the important part for Ethereum users is that gas fees should be much more stable (and hopefully more affordable) with EIP-1559.

How Bullish is ETH Burning in EIP-1559?

The average cryptocurrency investor is extremely bullish about EIP-1559 because it will reduce the total supply of Ether, make gas fees more predictable, and possibly lower gas fees. 

Reducing the total supply of Ether is the most bullish part of EIP-1559 as this will reduce the supply and subsequently increase the price of Ether… or so the theory goes. 

However, there is one little hiccup in EIP-1559 that EIP-1559 bulls overlook.

Miners Hate EIP-1559

Yes, Ethereum miners hate EIP-1559. The reason is fairly simple – they will no longer receive transaction fees. 

Sure, proponents of EIP-1559 will increase the price of Ether, which will be enough incentive for miners to mine Ethereum. The problem is this might not actually be the case when the proposal is rolled out in July. 

Again, the reason is simple – cryptocurrency is extremely volatile. For instance, if the price of Ether were to drop 70% in July when EIP-1559 is rolled out, then there will likely be a large number of Ethereum miners that simply move to greener mining pastures than deal with the low reward of mining Ethereum.

Another problem will occur if a miner exodus occurs from Ethereum.

A 51% attack. For those unaware, a 51% attack is when one group controls over 50% of the hash rate and uses that majority to confirm or deny transactions and prevent other miners from mining. 

This would be especially problematic for Ethereum because so many DeFi protocols are on the blockchain. It’s our opinion that a 51% attack on any blockchain would effectively mark the end of that blockchain.

The Future of Ethereum with EIP-1559

We know it can sound gloomy with the potential for a 51% attack and a miner exodus, but that point was only mentioned to show that EIP-1559 can have some problems. 

The more likely scenario is that the bulls are correct and EIP-1559 launches the price of Ether to a new high. And the popularity of the blockchain will likely increase as gas prices become a little more predictable and manageable. 

It’s important to not get ahead of ourselves with EIP-1559, though. Ethereum still must release Ethereum 2.0 and fix the scaling issue for it to see any sort of success. A solution like EIP-1559 is simply a temporary fix to keep users happy until Ethereum 2.0 is released. 

Final Thoughts

That’s about it for EIP-1559. This is the most significant EIP in recent Ethereum history and does have potential to greatly increase both the popularity and price of Ethereum. However, as mentioned previously, it’s important to not get too carried by the potential impact of EIP-1559.

It’s not a perfect solution, but it does address one of the bigger concerns that users have about Ether – inflation. With that in mind, most cryptocurrency experts do expect to see some price increase from EIP-1559.

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