VYSYN Ventures Weekly Insights #63 — Ethereum outpaces broader cryptocurrency market as London hard fork introduces significant changes
The highly anticipated “London hard fork” of the Ethereum protocol has been activated. The activation took place on August 5th and introduces the second major phase of Ethereum 2.0.
Since the upgrade, the Ethereum market has not disappointed. The market began recording significant movements to the upside and has strong bullish momentum behind the move. The broader cryptocurrency market has also been rising but Ethereum has been outpacing the majority of coins, including Bitcoin.
In the latest VYSYN release, we highlight the details of the Ethereum London hard fork with a focus on what it means for the Ethereum network and its token, ETH. We also analyze the corresponding movements in the Ethereum market and how the upgrade could impact the future of the technology.
London hard fork implements second phase of Ethereum 2.0 transition
The London hard fork is a giant step toward the upgrade to Ethereum 2.0, which is the total migration of the Ethereum network protocol from an original Proof-of-Work (PoW) algorithm to Proof-of-Stake (PoS) consensus. The PoW algorithm entails the use of immense computational power to confirm and validate transactions. A PoS consensus will introduce a system whereby large holders who stake their tokens will act as validators.
Vitalik Buterin foresees the upgrade to Ethereum 2.0 is reducing the carbon emission tied to Ethereum validation activities by not less than 99%. With the recent backlash against the environmental impacts of PoW mining, this is likely one of the driving factors behind Ethereum’s outperformance in the cryptocurrency market.
During the London hard fork, some other key changes were made in the Ethereum network, including the introduction of Ethereum Improvement Proposal 1559 (EIP-1559). Buterin described it as “the most important part of London”. He also noted that this particular upgrade is “proof that the ethereum ecosystem can make significant changes”.
This particular improvement involves a ‘transaction fee burning mechanism’ that will make Ethereum deflationary, as it will eventually introduce a capping mechanism to the Ethereum network, similar to Bitcoin’s 21 million maximum supply. This is likely another major factor behind Ethereum’s outperformance as it increases the scarcity of the Ethereum token supply. Moreover, the token burning associated with the implementation of the London hard fork had an immediate impact on market conditions.
ETH responds to London hard fork
Within the first 24 hours of the London hard fork, 4,600 ETH was burned, which was worth roughly $12 million at the time. This affected the economics of Ether, as the burning of the tokens directly reduces available supply. Ethereum surged as a result of this and continues to rise.
Roughly ten days before the London hard fork upgrade, Ethereum began rising in line with the wider crypto market. This increase accelerated after the hard frok was implemented as Ethereum quickly rose from $2,500 to $3,300.
Impact on Ethereum fees
In the past couple of months, with the spike in NFT implementation and the surge in DeFi, traffic on the Ethereum network increased significantly. The majority of decentralized computing applications such as DeFi and gaming reside on Ethereum.
Similarly, Ethereum has attracted the majority of the NFT ecosystem. As a result, there was high competition in the execution of transactions, leading to protracted delays for transactions with low gas fees. For quick confirmation, users had to pay very high gas fees on the Ethereum network.
At the peak of congestion, Ethereum users paid as high as over 700 Gwei as daily average gas fees on the network. This is in comparison to the daily average gas fee of less than 20 Gwei before the middle of 2020. After mid-2020, transaction fees have remained elevated as DeFi and NFTs proliferated and attracted mainstream attention.
One of the implementations of the EIP-1559 proposal is the introduction of base fees for transactions. With the new implementation, users would not have to pay the kind of exorbitant fees that was experienced in the recent past. This does not entirely mean that users cannot jump queues for speedy transactions. There is still the opportunity to pay higher fees, albeit willingly in the form of tips to enable faster validation or confirmation of transactions.
This new model of transaction fee payment has kicked in and users are already paying far less than what it used to be a few months ago. The average fees received by miners is now between 10–15 Gwei on the average, per block.
Speculators foresee Ethereum passing $10,000!
The recent scalability problem mentioned above led to an exodus of users and builders out of the network to rival platforms. The Solana blockchain has particularly seen strong growth. However, with the recent changes, we may see a mass return of users and builders to the Ethereum network.
As a result of all these bullish developments, it is no surprise that some are anticipating vast rises in the price of ETH. There are some projections of the price of ETH reaching and possibly trading above $10,000 by the end of 2021.