The dApp builder has further surged in utility thanks to the advent of decentralized finance (DeFi) and the growing popularity of non-Fungible tokens (NFT).
These developments likewise contribute to the upward price trajectory of Ether (ETH), the native digital asset of the Ethereum blockchain. The most recent bull run saw Ether reach a new all-time high of $4362. While this figure represents more than 10x increase from the price about seven months before, many believe that it is still heavily undervalued.
Scalability Issues and Gas Fees
A number of tailbacks have dimmed the digital asset’s light in recent times, despite its rising use case. The culprit being the notoriously high gas fees that has forced even the most loyal Ethereum maxis to consider cheaper alternatives.
In May 2021, data from blockchain data aggregator, BitInfoCharts showed that the average gas fees for transactions on Ethereum blockchain reached an all-time high of $70/txn, almost double of the previous all-time high reached a week before.
Although the issue of high gas fees has been synonymous with the Ethereum blockchain for a while, the growing use of DeFi and the NFT frenzy have amplified the scalability problems of Ethereum, leading to increased scrutiny and calls for an improvement.
Ethereum Foundation Response
The Ethereum Foundation, a non-profit community that supports research and development of Ethereum network has since leapt into action to resolve the inherent scalability issues by proposing an upgrade which it terms Ethereum 2.0.
The highlight of the upgrade dubbed “Serenity” is the shift from the traditional, energy intensive Proof of Work to the Proof of Stake consensus mechanism. To achieve this goal, the Ethereum Foundation released a roadmap involving a series of Ethereum Improvement Proposals (EIP) that ultimately pave the way to Eth 2.0. A lot has been said about the highly anticipated upgrade as the countdown nears its teeming end, but it is important to pop the ultimate question as Ethereum bulls intensify their “shill fest”.
What does Ethereum 2.0 spell for the average end user seeking to transfer value or an NFT artist who intends to monetize his artwork or a developer who wishes to host a decentralized application. What impact could it have on Ether price?
High gas fees are the primary reason for the network congestion and poor scalability of the Ethereum network. As is expected, miners will prioritize transactions with higher gas fees in order to earn more rewards. When they do so, transactions with much less fees are left pending. More incoming transactions then join the queue of uncompleted transactions, leading to network congestion.
One major objective of Ethereum 2.0 is to make the network as user-friendly and cost-effective as possible by drastically cutting down transaction fees, thereby making the network more scalable. Ethereum 2.0 features a multi-chain network which is achieved through Sharding. Sharding refers to a process of splitting the Ethereum network into various chains in order to accommodate more transactions and facilitate scalability.
In Phase 1 of the roadmap, the Ethereum blockchain will be divided into 64 shards where the entire network load will be distributed. This upgrade is poised to take Ethereum from a meagre 13 transactions per second to about 10,000 transactions per second.
One of the Ethereum Improvement Proposals, EIP-1559 dubbed the ‘London Upgrade’ went live earlier this year. The EIP-1559 proposes a change in the miner’s reward system through a token burn mechanism that burns a portion of gas fees. According to the proposal description, EIP 1559 will checkmate inflation.
After the upgrade went live, data from EtherChain showed that about $10,000 worth of ETH was burned every minute and millions of dollars hours after. The burn rate means that circulating supply could drastically reduce over time, leading to lowered supply, increased demand, and a subsequent surge in Ether price.