The London Hard Fork, Ethereum 2.0 update has been implemented and since then over 2.5 million Ethereum has been burned. The Ethereum burn is a cut from miners’ fees that is ultimately helping the price of the coin rise.
Ethereum is the second largest crypto coin with over 18% market dominance with over $200 billion of marketcap. Ethereum works on the Proof of Work (PoW) model that consumes a lot of electricity to perform even a single transaction. Also, the TPS (Transactions Per Second) of Ethereum is just 15 to 17 transactions. This was fine when there was little traffic on the Ethereum network. Now that DApps, DeFi, and NFT projects are building using Ethereum infrastructure the network has turned overcrowded.
Since there are more transactions in line than it can process per second, the traders have to pay more fees to prioritize their transactions. Moreover, the soft cap nature of the coin was also bothering as its supply has already surpassed the maximum supply of Bitcoins.
EIP 1559: The London Hard Fork:
EIP 1559 (Ethereum Improvement Proposal), also called London Hard Fork was implemented on August 5, 2021, 12: 33 PM UTC. Cryptocurrencies are like software that require bug removal and upgrades over time. The community proposes Improvement proposals which are called BIP (Bitcoin Improvement Proposal) and EIP (Ethereum Improvement Proposal) by their respective communities. EIP 1559 was the recent Ethereum update that led us to Ethereum 2.0.
Why Ethereum 2.0?
The PoW model of Ethereum was bothering many environmentalists and the carbon footprints were actually hurting the climate. Also, the lower transaction speed was bothering the traders as there was uncertainty about the gas fees. The unlimited supply of the coin was pushing the price down.
Therefore, Ethereum 2.0 is their first step to shifting to the Proof of Stake (PoS) model which consumes 99% less electricity than PoW. Ethereum 1.0 has a block time of 13 seconds compared to 10 minutes Bitcoins. Ethereum 2.0 has enabled Ethereum to reach 100,000 TPS.
How Ethereum Burn Is Lifting The Price?
The price of a token depends on two factors:
- Circulating Supply of the token
Both of these factors are inversely related. If the circulating supply increase with the constant marketcap the price drops and if the marketcap increases with constant circulating supply, the price increases. The price can be calculated with the simple formula:
Price of a coin=MarketCapCirculating Supply
Since Ethereum is a softcap asset meaning there’s no upper limit to the supply of the token, it started affecting the price. As the number of transactions on the network grew, the miners started mining more Ethereum. Therefore, in the Ethereum Upgrade, Ethereum burn was implemented. What Ethereum burn does is, that when Ethereum miners mine new Ethereum to add to the circulating supply, a percentage of this is sent to a null wallet. The Ethereum sent to this null address is lost forever, excluding them from circulation.
So far 2,563,351 Ethereum coins worth $4,428,887,546 have been burned. The Ethereum burn is reducing nearly 53.9% from entering circulation. The current price of Ethereum is $1,725 with a marketcap of $210,157,494,936. What if Ethereum burn was not implemented and these 2.56 million Ethereum were part of the circulating supply? Let’s find out.
Price of Ethereum=$210,157,494,936121,734,206.06+2,563,351
Solving this simple equation gives us the price of Ethereum ~$1690 – a clear difference of $35 in less than a year. A crypto CPA should be able to explain this to you in an understandable way.
Should Bitcoin Follow The Lead?
The proposed working model of Ethereum PoS is completely different than what Bitcoin is doing. The proof of stake mechanism of Ethereum randomly selects a validator to validate the transactions which are decentralized, yes, but it still includes human factor. Bitcoin constitutes the largest computer network that works combinedly to validate the transactions. Alden says, “Bitcoin without energy, without the work, is like airplanes with the flight removed, it’s taking out the key innovation of what makes it so useful.”
Ethereum is not only a coin that holds value – with EVM it is a full infrastructure that is single-handedly responsible for running hundreds of dApps and DeFi projects and thousands of NFT projects. This is not the case with Bitcoin. Therefore, probably PoW is the best model for Bitcoin and it should not follow the Ethereum lead.