Ethereum is on the verge of an extremely important upgrade that will fundamentally change the way that transactions are processed. Also, the upcoming implementation will reduce the supply of ether, resulting in a likely boost for the price.
Bitcoin had its last halving event back in May of 2020. The block reward was halved from 12.5 to 6.25 bitcoin, effectively cutting the bitcoin supply in half, and causing a huge supply shock that sent the price rocketing.
Ethereum, the second largest cryptocurrency by market cap, is about to implement an upgrade that will also reduce the supply of ether and change the way that transactions are processed.
The implementation of the upgrade should reduce the inflation rate of ether from 4% to 3% per year, so this would result in around half the reduction for ether proportionately to that seen in Bitcoin halving events.
According to an article published by Reuters today, Andrew Keys, managing partner of DARMA Capital, said that in his view the ether price did not reflect the upcoming upgrade on 4 August.
His estimation was that the Ethereum Improvement Proposal (EIP) 1559, together with another important upgrade in Q1 of 2022 can “easily quintuple the price of ether” by next year.
EIP-1559 is an upgrade to the Ethereum blockchain that changes how transactions are processed. It will provide a clear price on transaction fees paid to miners who validate the transactions, and will also burn a small amount of each transaction, which will lead to ether becoming deflationary over time.
Currently, there are two big issues for Ethereum transactions, according to Matt Hougan, chief investment officer for Bitwise Asset Management:
“First, it introduces a major uncertainty around whether you’ll get your transaction processed in a timely fashion,” he said. “Second, people overpay because they don’t know the clearing price and they bid too much to make sure the transaction is processed.”
The EIP-1559 upgrade resolves this problem by setting a base fee paid to miners for each transaction (part of which is burned). If users want a faster transaction, then they have the option to include a ‘tip’, which will speed things up.
Another adjustment that comes as part of the upgrade is that the block size will double, leading to more transactions being processed with each block.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
