The highly anticipated London hard fork, also known as the EIP-1559 upgrade, took place on 5th Aug 2021. Among all the changes that happened after the upgrade the most notable and controversial change was the Ethereum Improvement Proposal (EIP)-1559 itself that changes the way transaction fees, or “gas fees,” are estimated on the Ethereum network.
Before this upgrade, users making transactions on the Ethereum network use to bid for how much they’re willing to pay to have their ether transaction picked up and settled by a miner. At times this has proven very costly when there are large transactions in the pipeline or the network is in congestion. But with EIP-1559, this process is handled by an automated bidding system with a set fee amount that fluctuates based on how congested the network is. Also, a part of every transaction fee will be burned, or removed from circulation, which will begin to reduce the supply of ether and potentially boost its price.
According to the EIP-1559 proposal’s description, instead of fees going directly to the miners that process and validate transactions, a base fee would instead go to the network and promptly be destroyed. This was done to counterbalance Ethereum inflation while still giving the block reward and priority fee (the maximum fee users are willing to spend to include their transaction in a block) to miners.
$100M worth of ETH is burned
Since the London hard fork, in the last 7 days, over $100 million ETH tokens have been burned in the process and removed from circulation. This is helping Ethereum price to surge. ETH crossed the $3000 mark on 7th Aug 2021, a day after the hard fork. This is the first time ETH crossed this mark after the May downturn that wiped off trillions of dollars from the market.
At press time, a total of 31264.3 ETH has been burned equivalent to ~100 million USD at the current price of ETH which is currently trading at $3,179.62 as per the data from Etherchain. The current burn rate is 2.70 ETH per minute.
According to the data from the website ultrasound.money, the largest contributor to this burn is an NFT marketplace called OpenSea, where people can buy and sell digital collectibles and arts in form of NFTs. OpenSea alone has burned approx 3953 ETH, nearly ~10% of the total burn so far. Second, on the list of the highest burner is a decentralized exchange Uniswap V2 that has burned 2363 ETH so far. The top 5 on the highest ETH burner list alone have contributed to approx 10,900 ETH burn that is near ~40% of the total ETH burn on the network.
An important point to note here is while Bitcoin was created with a limited supply of 21 million BTC tokens. Ethereum on the other hand has no such ceiling. Hence EIP-1559 upgrade brings deflationary pressure on ETH. Ethereum is also moving towards the most awaited transition from being a Proof-of-work consensus model to a more sustainable Proof-of-stake consensus model. This transition is likely to happen by end of 2021 or early 2022. Due to Ethereum 2.0’s structure, the total supply of ETH may even decrease as more fees are burned than will be created.