Could 2022 bring an epic “ETH summer”?
Ethereum will remain TVL’s (total locked value) top blockchain in 2021, but its market share continues to shrink, falling from almost 100% earlier this year to 65%.
The main problem with this blockchain is PoW, which makes transactions delayed and expensive.
Ethereum developers are also aware that many new Layer 1 protocols offer a faster, more convenient network and are pushing to upgrade Ethereum 2.0 with 4 hard forks in 2021 to replace PoW with PoS.
These forks are:
– April: Upgrade Berlin.
– August: Upgrade London.
– October: Beacon Chain Altair upgrade.
– December: Upgrade of the Arrow Glacier.
Among them, the London upgrade received the most attention, largely because it affected everyone: users, owners, miners, and developers.
Market share of the chains according to TVL | The source: Footprint analysis
By changing gas charges by taking into account “elastic” block sizes, dividing gas charges into base charges – priority charges and the incineration of base charges – the London upgrade is likely to add further value to ETH.
What changes will the London upgrade bring?
– More stable and predictable gas charges: the base charge is calculated based on previous block usage, so the difference between blocks can be up to 12.5%, making it easy for users to predict the amount of gas they will be spending. Note that this doesn’t necessarily mean lower gas charges.
– Miners lose income: After the upgrade, miners no longer collect the entire gas fee as before, but only part of the priority fee. Future earnings will also be based primarily on block awards.
– The ecosystem will start to burn ETH: Ethereum has put in place a burning mechanism that quickly slows inflation. This change will likely tie the value of ETH to the value of network usage.
On December 31st, 5 months after the start of the burning mechanism, 1,317,700 ETH were burned, of which about 6.22 ETH per minute and 1.43 ETH per block.
Amount of burned ETH | Source: Footprint Analytics
The number of users choosing EIP-1559 as the transaction type also gradually increases from 50% at the beginning to 70% and on average around 10,000 ETH are burned per day.
Amount of ETH burned daily | Source: Footprint Analytics
While the London upgrade won’t overtake the network experience and lower fees, it sets the stage for Ethereum 2.0. By delaying the difficulty bomb (a mechanism that forces PoW to cease production of blocks), it ensures that miners can continue to generate revenue without being shut down by the PoW mechanism until the beacon chain is ready for use is.
How is the London upgrade draining ETH?
The London upgrade is the first step towards deflation for ETH, and scaling Ethereum 2.0 and Layer 2 will further fuel that effort. The Ethereum mainnet will complete its merger with the Beacon chain in 2022. After the upgrade, PoW officially becomes a PoS mechanism as the block structure changes from single-chain to multi-chain fragmentation.
The PoS mechanism has the advantage of better energy saving and capacity increase. The TPS on Ethereum 2.0 could reach 2,000-3,000 and eventually 100,000 TPS, which solves the current congestion problem.
The PoW mechanism will be phased out. Accordingly, mining will be a thing of the past by then and new coins will only be released via the PoS mechanism of 400,000 to 700,000 coins per year. After the London upgrade, at the current burn rate of around 10,000 ETH per day, around 3.65 million ETH per year will be burned, which is significantly more than the number of expenses.
In 2021, the ETH price rose from $ 738 at the beginning of the year to $ 4,182 in May. After a sharp drop in prices, ETH gradually warmed up and reached an annual high of USD 4,826 in the DeFi summer in November, the falling inflation rate after the London upgrade also made a significant contribution.
ETH price chart in 2021 | Source: Tradingview
After the introduction of Ethereum 2.0 in December 2020, the mining reward gradually decreased. Tim Beiko, Ethereum developer, expects Ethereum 1.0 and 2.0 to merge in April or May 2022, after which Ethereum 1.0 will gradually disappear and eventually expire. With the introduction of the PoS mechanism, Ethereum 1.0’s PoW mechanism will go down in history and ETH will soon be drained. For the optimists, they suggest that 2022 could bring an epic “ETH summer”.
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