Why Ethereum could become more valuable than Bitcoin thanks to EIP-1559


EIP-1559 will fundamentally change Ethereum.

But what exactly is behind the upgrade and why could Ethereum become a deflationary and potentially more valuable cryptocurrency than Bitcoin?

What is an EIP?

EIP stands for Ethereum Improvement Proposal. Since Ethereum is an open source program, anyone can send us a suggestion for improvement GitHub Submit. But in order for the new code to be integrated on the ETH Mainnet, it must first go through an approval process. In addition, the Ethereum core developers who manage Ethereum’s GitHub must confirm the improvement proposal at the end of the process.

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The passing of an EIP can therefore be thought of as the passing of a law by a parliament or a congress. An EIP can only be implemented after it has gone through a certain approval process. First someone has to propose an EIP, then it has to be approved by developers and finally the proposal has to be tested before it is fully implemented on the mainnet.

Why is EIP-1559 so special?

The EIP-1559 differs from all previous EIPs from Ethereum. The upgrade doesn’t just address the problem of the high transaction costs decrease, but also the Monetary policy of Ethereum fundamentally change. The upgrade could even make Ethereum a scarcer commodity than Bitcoin. In addition, small investors in particular hope that the EIP-1559 will lower the ETH transaction costs, which have risen sharply in recent months.

The graph from Etherscan shows that the Ethereum transaction costs have leveled off at an extremely high level for some time. Whales can still afford the high transaction costs, but Ethereum is currently unsuitable for a majority of users.

For this reason, many investors are currently relying on smart contract platforms such as Cardano (ADA), Polkadot (DOT) or the Binance Smart Chain (BSC). Above all, the BSC has been able to win over a considerable part of the capital and users of the Ethereum Decentralized Finance (DeFi) Space in the past few months. Meanwhile surpasses the turnover of some Decentralized Finance (DeFi) projects on the BSC even that of many large Ethereum DeFi projects.

Any of these Ethereum alternatives will result in users migrating from Ethereum. While many expect the Ethereum 2.0 upgrade to solve this problem, it is not yet clear when exactly this will be the case.

Some experts believe that it will take several more years for ETH 2.0 to be fully implemented. For this reason, the Ethereum community needs an interim solution as soon as possible, and this is exactly where the EIP-1559 is supposed to help.

How is the price of Ethereum transactions currently determined?

So far, transactions on Ethereum have been carried out with the so-called “first price auction mechanism”. With this mechanism, users outbid each other so that miners can add their transaction to the next block.

The competitive nature of this mechanism causes Ethereum transaction costs to rise. At the same time, it means that some often end up having to pay more unnecessarily than others, even though the transactions are in the same block. Therefore, this mechanism is far from fair or efficient.

That changes with the EIP-1559

The EIP-1559 won’t solve all the problems of the Ethereum network, but it will be a start. By making the EIP-1559 a Base fee introduces, the market price for transactions per transaction block can be set and Adjust block by block (depending on how full individual Ethereum transaction blocks are). So if the majority of the blocks are over 50 percent full, the transaction costs go up, and if they are less than 50 percent full, they go down.

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Because of this, the base fee can fluctuate between the time a user sends a transaction and the time a miner puts it in a block. To counteract this, users can set a maximum amount (fee cap) establish. This corresponds to the maximum amount that a user has to pay for a transaction.

After inclusion in a transaction block, the difference between the final basic fee and the specified maximum amount is returned. Wallets can set this value by default so that you don’t have to set it manually every time. The advantage of this is that users no longer have to guess which transaction costs to choose.

These new mechanisms make ETH transactions more effective, as the built-in flexibility ensures more transaction capacities.

In addition, the EIP-1559 carries a new option one that makes it possible for you to miners a Tip can give. This tip is intended to motivate miners to execute transactions faster.

EIP-1559: “A Boon for Ethereum Hodlers”

The EIP-1559 has a serious impact on Ethereum’s monetary policy. The upgrade could make ETH one of the scarcest cryptocurrencies in the entire market. That’s because the whole Base fee, i.e. the fee that everyone has to pay to carry out transactions on Ethereum, disappears permanently.

Because this fee is paid in ETH, more ETH will be burned as more transactions take place. Therefore, there is a possibility that the fee burn will massively counteract future inflation of the ETH offering.

Some Contributions from the ETH community even assume that the EIP-1559 could turn Ethereum into a deflationary asset in the long term if the ETH transaction volume continues to grow.

In a new one Podcast episode from Uncommon Core are designed by the three crypto experts Hasu, CryptoCobain and Zhu Su, CEO and founder of the investment company Three Arrows Capital, even a scenario where the EIP-1559 could help Ethereum overtake Bitcoin in the next few years.

The experts believe it is possible that the EIP-1559 will make Ethereum a deflationary cryptocurrency that will oppose a rapidly growing demand for ETH. The reason for this assumption is based on the fact that DeFi applications and NFT on Ethereum could grow massively in the next few years. That in turn would lead to an increased demand for ETH. In addition, they believe it is possible that Ethereum, due to its deflationary nature, could develop into a “safe haven asset” that Bitcoin could overtake.

If the three crypto experts have their way, then you should definitely listen to Ethereum. Even so, one should keep in mind that the EIP-1559 is not the panacea for all the problems that the Ethereum network has. Although the upgrade brings enormous improvements, it is already clear that the scaling problem of Ethereum cannot be completely solved by it.

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