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Ethereum, the blockchain that runs the ether, the second largest cryptocurrency under bitcoin, will undergo a major upgrade this week.
Foreseen for Thursday, the upgrade, called London, includes the Ethereum Improvement Proposal (EIP) 1559, which aims to change the way transaction fees, or “gas fees,” are estimated.
Currently, users have to bid on the amount they are willing to pay to have their Ether transaction picked up by a miner, which can be extremely costly. Under EIP-1559, this process will be handled by an automated auction system with a fixed fee amount that fluctuates depending on network congestion.
“It’s great for casual Ethereum users and makes the protocol less intimidating to use,” Make It Eric Conner, co-author of EIP-1559 and co-founder of EthHub, told CNBC.
Another major change under EIP-1559 is that a portion of each transaction fee will be burnt or withdrawn from circulation, which will begin to reduce the supply of ether and potentially increase its price.
That’s why, in part, “EIP-1559 is one of the most significant upgrades to Ethereum since the network launched,” said Meltem Demirors, chief strategy officer for CoinShares.
Here’s what investors need to know as the upgrade unfolds.
What EIP-1559 Means For Investors
While EIP-1559 aims to strengthen the ecosystem of Ethereum – which is known for its smart contract capabilities that power DeFi, or decentralized finance, apps and NFTs, or non-fungible tokens, among others – there is unlikely to be much impact on investors in the short term, says Demirors.
In the long run, however, the co-authors of the proposal hope to make the ether deflationary by reducing supply. It would be “extremely beneficial” for investors, says Conner, especially “with all of the recent inflation talk in the United States.” This would give crypto investors the opportunity to own a deflationary asset.
But the EIP-1559 proposal alone won’t make the ether deflationary, Demirors says.
“A lot of these expectations are probably too optimistic in the short term and will become more important in the long term,” she says. This is because “the nominal quantity of gas burned will not exceed the inflation of the network”.
The EIP-1559 would also not reduce gas prices or the cost of network transactions, which can be very high.
Nonetheless, the upgrade is important because it has the potential to improve the user experience of Ethereum and may increase the price of Ether.
Other innovations around Ethereum are also in the works, Demirors says. This includes the planned migration from a Proof of Work (PoW) model to a Proof of Stake (PoS) model later this year or early 2022.
In the PoS model, a person can fetch or validate transactions based on the number of coins they hold. In a PoW model, miners must compete against each other to solve complex puzzles in order to validate transactions. Supporters of the PoS model say it will use less power and improve blockchain efficiency.
“Taken together, EIP-1559 and the switch to PoS will have a major impact on the miners and economy of Ethereum,” Demirors says, “but at the moment, the upgrade alone does not.”
Overall, “I think the most important thing the EIP-1559 shows investors is that Ethereum is still an actively developed project that refuses to stagnate and become obsolete,” Conner said.
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