Ethereum – the second-biggest cryptocurrency and one that’s home to many new financial applications – is getting a face-lift, one that could potentially boost the coin’s price.
Ethereum will soon undergo a major software upgrade, code named London, that will trim the pace at which the supply of Ether tokens grows. A change called EIP-1559 will split up the roughly 13,000 new Ethers issued each day for miner payment “gas fees” into three parts. One of these, the minimal or base fee that users pay to process transactions, will now be removed from circulation in a process known as burning.
“The London upgrade is one of the most interesting and important upgrades in the history of Ethereum,” said Kyle Samani, co-founder of investment firm Multicoin Capital, which holds Ether, citing the reduction of the coin’s supply as a path to higher prices through increased scarcity.
User base fees now account for somewhere between 25% to 75% of the gas fees paid to miners, Tim Beiko, the coordinator for the core Ethereum developers, said in an interview. Once these coins are burned, Ether’s current supply increases of roughly 4% a year will be reduced.
The supply could drop further once Ethereum moves to a different mechanism of verifying transactions, probably in the first quarter of next year. This new verification system will use computers supporting the Ethereum network to stake Ether coins instead of miners in most cases. The amount of new coins issued will slow, which could increase the price, Beiko said.
The London upgrade, which will take place on Aug. 4 or 5, depending on when the system reaches the point on the blockchain where the update is scheduled, will also benefit Ethereum users by making user fees more predictable and reduce delays in processing most transactions, Beiko said.
“It’s just going to make the overall user experience better, because, in theory, there should be fewer failed transactions,” Katie Talati, vice president of research at Arca, a crypto asset-management firm, said in an interview.
The miners’ views
While the London upgrade will create an initial revenue hit for miners supporting the network, over time they should still benefit as the value of their Ether holdings grows, Beiko said.
“If the Ethereum ecosystem becomes stronger and larger, we will of course benefit from that, just like ordinary users,” said Slava Karpenko, chief technology officer at 2miners, an Ether mining pool. And miners will still be able to earn coins by helping traders execute transactions such as arbitrage trades.
While some miners might not go along with the upgrade and create a separate version of Ethereum — a so-called fork — that’s unlikely to gain a lot of traction.
“At the end of the day the miners are going to have to follow the users, because they are the ones paying the fees,” Talati said.
What’s more, London contains code that will deploy a “difficulty bomb” in December, which can make the coin impossible to mine without using a software upgrade.
The upgrade is happening just as Ethereum celebrates six years since the software’s initial release. The network now supports many popular and fast-growing decentralized-finance apps holding more than $66 billion that allow people to trade, lend and borrow coins peer to peer, without intermediaries like banks, according to DeFi Pulse.
Even after a price rally during the past 10 days, Ethereum’s $271 billion market cap is still nearly half of what it was in May, when Ether hit its all-time high. Most cryptocurrencies have been sliding in recent months due to factors such as tightening government regulations.
© 2021 Bloomberg L.P.