With the ETH 2.0 merger approaching, Ethereum is in full deflation mode

The Ethereum community has been working hard in the past few years to lay the foundation for the transformation from the current Proof of Work (PoW) algorithm, which is still the backbone of the Ethereum blockchain operation to this day.

The transition of Ethereum to Ethereum 2.0 based on Proof of Stake (PoS) is progressing, and recent updates have caused the issuance of Ethereum (ETH) to gradually turn to deflation.

The recent upgrade has helped ETH turn to deflation. The burned ETH has exceeded the new ETH obtained through mining. Before the network was upgraded to ETH 2.0, some people in the industry did not expect this to happen. This is an important factor that is expected to drive the value of ETH to rise in the coming months and years.

From the perspective of the impact on the value of ETH, the impact of this shift to deflationary issuance earlier than expected cannot be underestimated. In addition, industry insiders believe that once the network fully transitions to ETH 2.0, this deflation will intensify.

Recent development

At the end of last year, the launch of the beacon chain laid the foundation for the transition to ETH 2.0, allowing users to become validators by staking ETH. This will essentially replace the current role of miners who use physical hardware to verify transactions, add new blocks, and generally maintain the network.

As of November 17, 2021, more than 260,000 validators have pledged the minimum 32 ETH required to become an on-chain validator. As of the time of writing this article, the total amount of ETH currently pledged is 8,327,638 ETH — valued at approximately 34.1 billion U.S. dollars.

The value of Ethereum has been on a steady upward trend in 2021, and has reached a new high this year driven by various factors, including the explosion in the field of decentralized finance (DeFi), and a large part of the projects are in the Ethereum block. Run on the chain.

The most anticipated upgrade in 2021 is the London hard fork, which introduces some Ethereum Improvement Proposals (EIP). Among them, EIP-1559 has become a point of dispute due to changes in the fee structure earned by miners and the fee structure paid by users.

One pain point is the built-in ETH destruction mechanism, which erases part of the ETH used to pay transaction fees. Given that transaction fees are a driving factor that motivates miners to maintain the network, this proposal angered Ethereum miners before the upgrade.

An important benefit of the London hard fork in July 2021 is the deflationary effect of the ETH destruction mechanism. Now every transaction has a certain percentage of ETH destroyed, gradually leading to more ETH being removed from the ecosystem, which should increase the scarcity and value of ETH as an asset.

A big publicity point before the completion of the London hard fork was the ability to reduce the GAS fees paid by users. However, this goal has not been fully achieved. In November 2021, high costs are still a worrying issue. This makes some investors hope to use a multi-chain decentralized financial network to alleviate the high GAS fees that still exist on the Ethereum mainnet.

After the London hard fork, the most recent upgrade to the Ethereum network was called Altair. As Beiko told Cointelegraph, Altair is the first update of the beacon chain since its launch in December 2020. According to him, this upgrade is a test of the merger, but also to adjust the incentive mechanism of validators.

“This upgrade has increased the penalties for validators when submitting invalid blocks or offline, bringing them to a level of’realistic’. The penalty was reduced when the beacon chain was launched, in order to encourage validators through more relaxed policies in the early stages. Participate. Now that we understand that things are working reliably, it’s time to raise the punishment to a level where they are realistic.”

Ben Edgington, Chief Product Officer of Teku (the ETH 2.0 client created by ConsenSys), also commented on the complexity of Altair’s upgrade: “We have never done it before and want to make sure everything before we move to proof of stake for a major upgrade. Smooth.” He added, “Things are going very smoothly and we are confident that we can coordinate future upgrades.”

Edgington emphasized some substantial changes in the introduction of Altair, while acknowledging that most of these upgrades are general improvements and may not be obvious to the pledgers.

Edgington said that the synchronization committee was introduced as an enhancement that will allow light clients to synchronize with the state of the beacon chain trustlessly, which makes it “possible to have a browser built-in wallet that does not rely on any trusted third parties in the future.” .

The block reward has also been fine-tuned in the internal calculation method. Proposal blocks now receive higher rewards and more technical changes, while pledge rewards remain the same.

The last important change is the penalty of forfeiture. When the beacon chain went online last year, the penalty threshold was lowered. The purpose of this measure is to prevent improper behaviors of verifiers on the network, including being offline and unable to sign transactions. As Edgington explained, there is now enough time to judge the effectiveness of the mechanism.

“When the beacon chain was launched, we lowered the penalty for confiscation to encourage pledgers to participate. Now, we are all more familiar with the pledge mechanism, and the fines have gradually increased to their more appropriate value.”

Some representatives from the Ethereum client team attended a seminar called Amphora in October. The team collaborated on a series of development milestones to mimic the testnet’s Eth2 merger—actually a rehearsal for the actual operation sometime next year.

Edginton interpreted the results of the seminar and gave his best estimate of the transition to ETH 2.0 sometime in the second quarter of 2022:

“We are now working hard to establish a public merger testnet called’Kintsugi’, which is scheduled to go live in early December. The purpose of the testnet is to implement candidate designs for the merger, which means that the technical implementation work has been completed. After this, in Before a real merger takes place, only a process of testing, risk management and management is required.”

Concentrate on the ETH 2.0 merger

The ETH 2.0 roadmap also has a small upgrade plan in 2021. Arrow Glacier is made up of a single EIP-4345, which changes the parameters known as the Ethereum Ice Age difficulty bomb.

The difficulty bomb is the name of the current PoW Ethereum mainnet that plans to increase the difficulty for miners. After the bomb goes online, the mining difficulty of the Ethereum network will increase exponentially above a certain threshold, and will serve as one of the driving factors for the entire Ethereum network to participate in the merger into ETH 2.0.

Beiko stated that the main focus of the broader Ethereum development community is now fully focused on “mergers”, marking the beginning of the last chapter of the blockchain’s evolution to PoS consensus.

What will Ethereum look like after ETH 2.0

Although the exact date has not yet been determined, both Beiko and Edgington emphasized the fact that Ethereum developers are now fully focused on the final steps of ETH 2.0.

Nevertheless, many cryptocurrency users and enthusiasts are asking the same question. What will happen when ETH 2.0 is implemented? Edgington gave some insights on how the network will work with various second-layer solutions, providing improvements to scalability:

“The shift to proof-of-stake will not immediately bring a large increase in throughput for Ethereum, so I don’t expect it to have a measurable impact on the price of GAS. Ethereum’s scalability strategy now revolves around the second layer of resolution Solutions, such as the various ROLLUPs currently being deployed. Once the merger is completed, we will focus on providing data sharding within the Ethereum protocol, which will enable ROLLUP to expand on a large scale.”

Edginton also pointed out that due to the cancellation of block rewards, the issuance of each block after the merger will drop by 2 ETH, and EIP-1559 will continue to burn ETH as it is now. “Therefore, in the foreseeable future, the total supply of ETH is likely to shrink.”

Viktor Bunin, a protocol expert at Coinbase, emphasized the importance of the London hard fork earlier this year and its widely discussed EIP-1559. He said that the mechanism set by the upgrade shows to a certain extent that the value of ETH will change with the development of the deflation mechanism:

“Since its launch, EIP-1559 has reduced the net issuance of Ethereum by 66%. If the merger takes place today, the net issuance of ETH will actually be negative, making the network deflationary. Around EIP-1559 and running The key bit of the validator is making the asset of ETH more useful. Previously, ETH only indirectly captured the upside generated on Ethereum, and having directly measurable indicators would help industry participants understand their holdings And the value and utility of using ETH.”

These views were endorsed by Yuga Cohen, a software engineer at Coinbase, who delved into the data to outline the impact of EIP-1559 so far and how it will continue when the merger finally occurs. “Despite the existence of a destruction mechanism, the total income of miners in U.S. dollars has actually increased by 33%. As validators replace miners, more ETH is pledged — at least temporarily locked — to ensure network security, and the scarcity of ETH has risen. Will become part of its value proposition.”

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