Ethereum in full deflation as Eth2 consolidates nearer

The Ethereum community has worked hard over the past few years laying the foundation for the transition from the current Proof-of-Function (PoW) algorithm, which remains the backbone of blockchain operations to this day.

Ethereum’s transition to its proof-of-stake (PoS) powered Ethereum 2 chain is getting closer to reality, with recent updates to its blockchain leading to the release of Ether (ETH) becoming deflationary.

The recent upgrades have resulted in a deflationary ETH issuance, where burning some of the transaction fees has overtaken issuing new ETH through mining. Some in the industry didn’t expect this before the network was upgraded to Ethereum 2 (Eth2). This is a key factor that is expected to drive the value of the underlying cryptocurrency higher in the coming months and years.

The impact of this earlier than expected shift on ETH’s deflationary issues cannot be underestimated in terms of its impact on ETH’s value. Additionally, industry participants believe that this deflation will increase if the network completely migrates to Eth2, more than ten times the current output of 2 ETH per block mined.

Recent developments

The foundation for the transition to Eth2 was laid late last year when the proof-of-stake beacon chain went live, which allowed users to validate Ethereum. This will essentially replace the role of existing miners who use physical hardware to validate transactions, add new blocks, and generally maintain the network.

As of November 17, 2021 there are over 260,000 validators who have set the at least 32 ETH required to become validators in the chain. At the time of writing, the current number of Ethereum tokens is 8,327,638 ETH – valued at approximately $ 34.1 billion.

Ethereum’s value is on a steady upward trend through 2021, making new highs this year driven by a variety of factors, including the explosive popularity of decentralized finance (DeFi).

The most anticipated upgrade in 2021 is the challenging fork in London, which introduced several Ethereum Improvement Proposals (EIPs). One particular proposal, EIP-1559, is a point of contention due to the change in the fee structure that miners earn and users pay.

It’s worth noting that the built-in ETH recording mechanism destroys part of the ether that is used to pay transaction fees. This angered the Ethereum miners prior to the upgrade as transaction fees were an incentive for the miners to maintain the network.

Related: Bitcoin Taproot Upgrade improves the network as the impact on BTC price can be limited

A central strength of the London Tough Fork, which will take place in July 2021, is the deflationary approach of the ETH writing mechanism. Each transaction will now destroy a percentage of ETH, which will gradually result in more ETH being removed from the ecosystem, which will increase the scarcity and value of ETH as an asset.

London is also welcome to see a reduction in the fees paid by users of the Ethereum network. Ultimately, however, this did not materialize as the high fees from November 2021 continued to be a cause for concern.

The most recent upgrade of the Ethereum network to London is called Altair. As Beiko told Cointelegraph, Altair serves as the first update to Beacon Chain since it was launched in December 2020. In his opinion, the upgrade serves as an experiment in concurrent consolidation.

“The upgrade has raised the penalties validators receive for recommending invalid or offline blocks to their“ real ”level. When Beacon Chain was introduced, these penalties were lowered to give early stakers more leniency. Now that we know everything is working reliably, it is time to get the penalties back where they really are. “

Ben Edgington, Lead Product Owner of Teku, an Eth2 customer of ConsenSys, also commented on the complexity of the Altair upgrade: “We had never done it before and wanted to make sure everything was in order when we went to the proof of the upgrade Stake have passed. He added that “It went very smoothly and we are confident that we can coordinate future upgrades.”

Edgington highlighted some of the material changes introduced on the Altair, but acknowledged that most of these upgrades are general improvements that manufacturers may not have been aware of.

The sync commission was introduced as an improvement that would allow lightweight clients to reliably sync with the state of the beacon chain, according to Edgington, which makes it “likely” in the future if there are things like wallets in the browser that don’t do rely on trusted third parties. ”

Block rewards are also optimized in terms of their internal calculation. Suggested blocks will now receive higher rewards along with some other technical changes, while staking rewards will remain unchanged.

Finally, an important change was made to the penalty cut, which was set to a reduced threshold when Beacon Chain went live last year. Slashing is used to prevent validators from misbehaving on the network. Examples of this are going offline and thus signing transactions. As Edgington explains, there is now enough time to evaluate the effectiveness of the mechanism:

“The reduction penalties were reduced at the beginning of the Beacon Chain in order to strengthen the trust of the producers. Now that we are all much more comfortable with staking, the penalties for their “economically correct” values ​​are slowly increasing. “

Several representatives from the Ethereum customer teams participated in a panel discussion titled Amphora in October, which worked on a number of developments to mimic the Eth2 merger on a test network – effectively as a real dress rehearsal next year. Edginton unpacked the panel’s results and gave his best guess for the transition to Eth2 around the second quarter of 2022.

“We are currently working on a public merge test network called Kintsugi, which is expected to go live in early December next month. Kintsugi intends to create a release candidate design for The Merge, which means the technical implementation is complete. Then only one process of review, risk management and governance is required before The Merge can take place. “

Now let’s focus on ‘The Merge’

The roadmap towards Eth2 provides for another smaller upgrade for 2021. Arrow Glacier contains the lone EIP-4345, which changes the parameters of the so-called Ice Age Difficulty Bomb of Ethereum.

The difficulty bomb is the name for the planned incremental level of difficulty for miners in the current PoW Ethereum Mainnet. When Bomb goes live, the mining difficulty of the Ethereum network will increase exponentially above a certain threshold and will be one of the driving factors to motivate the entire Ethereum network to participate in the merger to Eth2.

Beiko says the main focus of the broader Ethereum development community is currently on “The Merge,” which signals the beginning of the final chapter in the evolution of blockchain towards PoS consensus.

What happens when Eth2 becomes a reality

While the exact date of “The Merge” has not yet been set, both Beiko and Edgington emphasized the fact that the Ethereum developers are currently only focusing on the final steps towards Eth2.

However, many users and crypto enthusiasts are asking the same question. What could happen if Eth2 becomes a reality? Edgington gave an insight into how the revolution will work in conjunction with various Layer 2 solutions and offers improvements in scalability:

“Switching to the Proof of Stake will not bring significant additional throughput to the Ethereum chain immediately, so I don’t expect any measurable effects on gas prices. The scalability strategy in Ethereum currently revolves around Layer 2 solutions such as the various roll-ups that are currently being implemented. Once the consolidation is complete, we will focus on providing data shards on the Ethereum protocol that will allow rollups to scale up to the masses. ”

Edginton also noted that due to the removal of the mining block reward, ether emission will reduce 2 ETH per block after the merger, while EIP-1559 will continue to burn ether as it is today: “The result is very likely The overall supply “of ether will decrease in the near future. ”

Viktor Bunin, protocol expert at Coinbase, highlighted the importance of the London difficult fork earlier this year and their much-discussed EIP-1559. The mechanisms put in place during the upgrade give an idea of ​​how the value of ETH will change as the deflationary mechanism picks up pace, says Cointelegraph:

“Since its inception, EIP-1559 has seen net emissions from Ethereum drop by 66%. If consolidation continues today, real ETH issues will actually be negative, making the network deflationary. The key around EIP-1559 and the running validators make ETH, the asset, more useful. While ETH has historically only indirectly captured the dynamics generated by Ethereum, it is helpful to have direct metrics to help industry participants understand the value and …