Ethereum's London Upgrade Expected To Burn Up To $5B In ETH A Year

Ethereum 1.0 relies on miners to deploy computational resources for verifying blocks and securing the network. Under the imminent Ethereum 2.0, validators will take on this role of voting on the next block.

The ongoing changes on Ethereum will eventually merge ETH 1.0 to the PoS chain in late 2022. The transition to PoS reached its most significant milestone with the highly anticipated London hard fork deployment on Aug 5, 2021.

This guide will examine the implications of the new fee-burning mechanism introduced by the London upgrade and how many Ether tokens are expected to be burned each year.

EIP-1559 is Burning ETH from the Network

The new EIP-1559 update is the most significant change introduced by the London hard fork. Ethereum Co-founder Vitalik Buterin first proposed the disruptive improvement to restructure the network’s gas auction mechanism.

Instead of paying transaction fees to miners, the new mechanism burns a part of that fee (basefee), thus taking that supply out of circulation forever.

The crypto community sees EIP-1559 as a welcome update that will help solve congestion and crippling fees on Ethereum. However, some miners are in an uproar due to the change, as it means that they will be getting fewer fees and will be made obsolete once the network transitions fully to Proof of Stake.

As per the latest data from Etherchain’s burn tracker, over 71,000 ETH has so far been burned by the protocol since EIP-1559 went live nearly three weeks ago. The block explorer estimates that 1.66 ETH are going up in metaphorical smoke each minute, translating to $5,458 worth of ETH taken out of circulation at current prices.

At this rate, the Ethereum network is projected to burn up to $5 billion tokens per year. The Bankless DeFi newsletter modularized the current figures and estimated that approximately 2.4 million ETH could be taken out of circulation by the end of 2021.

Meanwhile, data from Ethereum burning and inflation tracking platform places popular NFT marketplace OpenSea as the top ETH burner, destroying 368 ETH, or just under $1.2M since EIP-1559 was deployed.

Uniswap, a leading decentralized exchange (DEX), is second with 279 ETH burned, while popular blockchain-based gaming platform Axie infinity completes the top three with 196 ETH taken out of circulation.

The ETH Burn Rate Could Cool Down Over Time

The math isn’t so clear-cut on how many tokens will be destroyed over time since the burn rate fluctuates depending on demand for the network and the volatile price of Ether.

Approximately 25% and 75% of the total transaction fee is expected to be destroyed. Still, the rate isn’t static and is designed to adjust accordingly and burn more tokens during moments of higher demand.

According to one pseudonymous analyst, the Ethereum protocol is currently burning tokens at a very high rate, but things could cool down over time. He tweeted that the high burn rate currently averaging 3 ETH every minute is due to the immense backlog in pending transactions dubbed the ‘mempool.’

The blockchain security researcher added that blocks would reduce in size once the mempool is cleared in the next few weeks, slashing the current base fee significantly.

Uniswap founder Hayden Adams is upbeat about the revolutionary rollout of EIP-1559 which burned over $100 million worth of ETH just a week after the upgrade went live. He forecasts that his DEX alone is slated to burn close to $1 billion in ETH per year, calling the significant change a massive win for the Ethereum ecosystem.

Will EIP-1559 Transform Ether into UltraSound Money?

The current high ETH burn rate, combined with the reduction in block rewards issued to miners as Ethereum transitions to a PoS mechanism, promises to reduce inflation on the network drastically.

The new update allows for lower, automated transaction prices while making it easier to predict gas fees. The model also promises to transform ETH into a deflationary asset by burning the base fee instead of issuing it to miners.

Data from shows that EIP-1559 is already placing deflationary pressure on the supply of ETH, thus creating higher demand for the popular crypto. The website highlights that over 70,000 tokens have so far been destroyed by the protocol, indicating that ETH could soon turn into ultrasound money.

While new ETH tokens are still being issued on the blockchain, the new burn mechanism counters that rise in supply. That said, EIP-1559 on its own isn’t enough to make Ethereum completely deflationary.

Once the PoS shift is fully implemented, the network will start destroying more supply than it issues out to validators. Nevertheless, Ethereum is already feeling the burn as it recently registered its first-ever deflationary block.

Author’s Thoughts

EIP-1559 is an essential step in the move toward PoS that is expected to shake up Ethereum’s economics by increasing the scarcity of ETH and thus radically increasing the value of the cryptocurrency.

The ETH price has been on fire over the past few weeks, primarily due to the remarkable impact of the EIP-1559 upgrade. The second-largest crypto jumped to a two-week high just two days before the London hard fork went live as investors started flocking into the Ethereum project.

The altcoin has since crossed the $3K level for the first time in months. This impressive uptick confirms that the reduced supply and mounting demand for ETH are being reflected in the price.

Besides benefitting from reduced inflation brought on by EIP-1559, Ether is also expected to appreciate in value as the number of tokens staked on the Beacon Chain increases.

The ETH 2.0 Launchpad shows that the supply locked up in the deposit contract has now surpassed the 7 million mark. That translates to about $22 billion staked on the network at current prices.

The growing number of tokens staked on ETH 2.0 will remain immovable until the merger with ETH 1.0 happens in 2022, further moving ETH closer to becoming ultrasound money.

In conclusion, the latest change to Ethereum that makes it’s native token deflationary and improves the user experience is a game-changer for the blockchain project.

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