Algorithma Crypto Brief # 9 - Massive Ethereum burn & supply shock post EIP-1559
Let’s begin with - what is EIP 1559?
Today, Ether miners work via a very simple method. They look out for the highest bidder for their services to verify transactions. It’s like trains operating normally on a track and coming on the platform on time. You generally pay for a ticket from destination 1 to destination 2, based on time travelled.
However, the issues and delays start during rush hour. When a new chain or a IDO or liquidity or your favourite JPEG mania overtakes, that is where the problem becomes exaggerated. Gas fees go bonkers and the commoner cannot afford it anymore. Everyone starts to curse Vitalik & Ethereum & talks of an Ethereum killer prop up again. However that changed with EIP 1559 and more is about to change early next year with more improvements to Ethereum blockchain.
EIP-1559 introduces a “base fee,” a variable fee which is set by the protocol, that changes based on network congestion on a block by block basis. Base fee: is burnt forever so miners can’t collude -allows wallets to have the base fee automatically set -fluctuates smoothly.
The second thing introduced in EIP-1559 is the “miner tip,” which can be used to tip miners and help incentivize them to prioritize your transactions. Miner tip: (optional) goes directly to miner This will be especially useful for arbitrageurs or high volume traders on a DEX
The last big change proposed in EIP-1559 is an increase in the max gas limit If a miner sees that there was 100% utilization in the previous block, they will produce a block with the max gas limit in order to include more transactions, while driving up base fees in the process
A lesser-known effect of EIP-1559 is the establishment of $ETH as the ultimate currency on the network. Right now miners can include txs in blocks accepting 3rd party payment in $DAI However, with EIP-1559 the base fee is set automatically, & it requires payment in $ETH
Combine all of these factors with the merge to Proof of Stake, tx fees going to validators, $ETH being locked to stake, the record 23%+ of $ETH locked in smart contracts, locked in DeFi, metaverse and now gaming, the three year low exchange balances, and I think you’ll start to see why I’m so bullish with EIP-1559
Analysing EIP-1559’s ETH Burn
This burning basically reduces ETH’s net inflation rate as the burned ETH from base fees is permanently removed from circulating supply, effectively cancelling out some of the new supply and creating a lower net issuance.
Most of current fees is due to NFT drops left, right and center. That is also causing the gas prices to spike again. While some people are again talking of moving to other chains, we believe this is very bullish for ETH as it becomes the base layer - not just for DeFi but also NFTs and couple that with upcoming improvement, Q4 should be very bullish for ETH.
Source : UltraSound Money
Block #12965263 was the first deflationary in history. It has already been listed multiple times as an NFT on Open Sea. And then there are massive competitors entering the space. next race is to the DAO’s (that we will cover in a special edition) and Web 3.0. This journey has just started. Its going to be amazing for crypto and especially for Ethereum (and Solana)