Key points express:
EIP 1559 will see most gas fees burned, potentially deflationary for Ethereum.
Ethereum needs to maintain its status as the main platform for DeFi and smart contracts.
Ethereum is gradually transitioning to a Proof of Stake (PoS) consensus mechanism and is only about 2 months away from passing Improvement Proposal (EIP) 1559.
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The Deflation Debate
At present, this transition may not happen overnight, and Ethereum needs to fully switch to PoS before the deflation of EIP-1559 can really start. There are also views that Ethereum’s circulating supply may not reach a level where token burn exceeds inflation.
Developer Ryan Berckmans explained that EIP-1559 will cause most of the gas fees to be destroyed, although this effect may not happen immediately.
“EIP-1559 is expected to consume about 70% of fees, which is deflationary pressure. However, when EIP-1559 is released on July 14th, ETH will not be deflationary immediately, because proof-of-work will continue to generate net inflation. Fangfang converts to the proof-of-stake system (PoS)."
Yet when Ethereum 2.0 finally launches, inflation could turn deflationary.
Berckmans also added: “Following the switch to PoS, it is expected that the amount of ETH consumed by EIP-1559 will significantly exceed the total expected inflation rate of PoS, which is less than 1%.”
Not everyone agrees with this prediction, some believe that Ethereum may reach deflation even before switching to PoS, and others believe that the amount of ETH burned will not exceed the amount of newly minted ETH (block rewards).
Lex Sokolin of blockchain firm ConSensys said: “The deflationary effects of EIP-1559 should be noticed immediately, and will become more prevalent when Ethereum moves fully to proof-of-stake. The more transactions that happen, the more the base fee burns.” more deflation."
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Trends to keep an eye on
After Ethereum turns to 2.0, the PoS mechanism will cause a large amount of Ethereum to be locked in the Ethereum 2.0 mortgage contract.
Since the implementation of the Ethereum 2.0 mortgage contract in November 2020, about 4.6 million ETHs have been locked. As more and more platforms and wallets begin to support the mortgage of Ethereum 2.0, this mortgage trend may accelerate. Validators are likely to gain quite a bit from staking ETH, so this is very interesting.
The APR for node validators is 7.4%, which is expected to rise to 20%+ on the day of the merger. Of course, for verifiers, 20% is a very large amount, which may greatly increase the participation of node verifiers and further stimulate the market demand for ETH.
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Maintain demand advantage
An eternal question in the crypto space is whether Ethereum is better than Bitcoin (or vice versa), and the Ethereum camp says EIP-1559 and PoS will give Ethereum a clear advantage.
Even though Ethereum is not a fixed volume, there are arguably more factors that make it more deflationary than Bitcoin. For example, Ethereum is locked by the holder as a mortgage, or used as a service fee, because Ethereum is usually the real demand for on-chain transactions and calling smart contracts. Therefore, strong demand may reduce the number of tokens available for circulation on the market.
If ethereum manages to maintain its status as a major platform for things like decentralized finance (DeFi) and smart contracts, and prevent competing platforms from grabbing market share, then it has the potential for further growth.
Whether it will compete with or outperform Bitcoin, further growth will ultimately depend on future developments.
Through a variety of software development, it can provide more computing power and transaction capacity for Ethereum, and will also attract more developers, applications, and corporate investment. This will bring smoother usability, greater economies, and more usage to Ethereum.
