Ethereum "Tentatively" Schedules Major Monetary Policy Change
ETH supply inflation is now set to fall below Bitcoin's.
Last week Ethereum core developers met to discuss the inclusion of EIP-1559 in the London hard fork scheduled for July this year.
EIP-1559 was first proposed in April 2019 and has since been researched and debated among various stakeholders in the Ethereum community. On a core developer call last Friday, the proposal was tentatively accepted into a hardfork set to take place in July.
EIP-1559 intends to make Ethereum transaction fees more predictable and comes with an ETH-burning mechanism that is used to prevent miner collusion. Details of the EIP aside, the effect of burning ETH on the asset’s price is significant.
According to a Dune Analytics dashboard created by Phillippe Castonguay, EIP-1559 would have burned roughly 600,000 ETH so far this year, dwarfing issuance of roughly 200,000 ETH over the same period.
Since Ethereum’s inception, the blockchain’s “infinitely” inflating supply has caught a lot of flack, particularly among Bitcoiners who point to the 21,000,000 BTC hard cap as a cornerstone of its value proposition (note, there is no clear path for Bitcoin to maintain security once this cap is hit).
With EIP-1559, however, Ethereum can maintain security (via continued issuance) whilst also having a circulating supply that is deflationary (by burning transaction fees). The rate/extent of deflation is dependent on Ethereum usage, however with hockey stick growth in transaction fees, the reduction in circulating ETH may become even more dramatic than discussed above.
What’s yet to be seen is how Layer 2 and the adoption of EVM-compatible chains might effect total transaction fees on Ethereum. If enough activity moves off of Layer 1, then Ethereum post-EIP-1559 may continue to be inflationary, but this seems unlikely. Ethereum is continuing to perform an increasingly vital role as the decentralized bank of our future economy, settling highly valuable financial transactions with a level of security that no other chain can compete with, warranting far greater demand than what we see today.
The market does not appear to have priced any of this in. We can expect significant volatility in the run up to EIP-1559 (starting from now as investors begin to understand its implications) through to post-implementation when users scramble to secure holdings of a valuable asset that has begun its journey to scarcity.
In this preview we look at:
EIP-1559 boosts price
NFT market begins irrational exuberance as $2.5M bid placed on a Tweet
Ethereum’s emerging economy
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