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Ethereum Network activated the major upgrade to the blockchain on Thursday. The upgrade includes the Ethereum Improvement Proposal (EIP) 1559, aiming to change the way to estimate the transaction fee.
What users used to do till now is they bid for how much they want to pay for having the ETH transaction to be picked up by the miner. Now, this method is pretty costly. With the upgrade, an automated bidding system will handle this process with a fixed fee. Notably, the fee will fluctuate according to the network congestion.
Secondly, a part of every transaction will be removed from the circulation, i.e., that part will be burned. This step will ultimately reduce the supply of ETH.
The ethereum blockchain was having many problems in the past few months, including its exorbitant transaction fee, high unpredictability and scaling issues. With the growth in DeFi space built on Ethereum Blockchain, it became even necessary for the system to upgrade. Ethereum’s London Hard Fork was somewhat controversial, but now, with its activation, it indeed can prove to be a new beginning for ether mining.
EIP-1559 introduces a base fee to add transactions to the network. Also, the gas fee will automatically be changed depending on the market demand. It adds a new transaction type that helps users choose the maximum fee they want to pay.
What do you think is the major problem with the fee mechanism of Bitcoin and Ethereum as of now? Well, it is the cost estimation. The current mechanisms are simple, yet they aren't efficient. Here, EIP-1559 makes all the transactions pay almost the same fee, thus solving the inefficient fee mechanism problem.
Another essential thing to consider with the recent upgrade is its better security. EIP-1559 destroys the transaction fee and thus extends the time for block rewards to incentivize the miners. It doesn't increase the total supply and ensures the security of the network.
The price of ETH has climbed up around London Hard Fork and EIP-1559. The current market price of ETH is $2,874.
The increase in ETH price is due to the decrease in its supply. It could be directly linked to the London Hark fork, which occurred yesterday. Let me explain this. EIP-1559 effectively changes the method to calculate the transaction fee, including the burning of some fees, which ultimately reduces the supply. Burning of the fees would mean a higher demand for Ethereum and hence, lowering the supply.
It is pretty obvious that the price of any asset depends on the demand and supply interaction. If we can accurately measure the demand and supply, we can predict the price as well. So, in the case of EIP-1559, it decreases the supply by burning apart every time a transaction is made and increasing the demand. It means that price of Ethereum is going to rise more in the near future.
What we cannot predict accurately at the moment is the amount of supply to be burned. Another factor that can determine the price is the movement of ETH in the market. It means if more people start to hold the crypto, then the supply might not decrease, and it will not much affect the price.
As of now, the price is continuously increasing soon after the London Hard Fork.
The current upgrade is indeed an excellent way for improving the economics of the Ethereum network. It will bring more transparency around the gas fees. Additionally, the Ethereum network has again proved itself to be an actively upgrading project which definitely is a good thing for the investors.