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Ethereum ETH 2.0 – The London Hard Fork, EIP 1559, is live and prices are soaring. A step-by-step approach will lead to Ethereum 2.0. The question is whether to use ETH or not. After ETH has gone from strength to strength since the Ethereum London Hard Fork, it has been less than a week since the fork.
Many of my followers have asked me if I’m still bullish on Ether because of the renewed confidence in the currency. As a result, I was reminded that I needed to update my ETH post.
I’ll dive into Ethereum yet again today. What the London upgrade means for ETH 2.0 and how it will impact the price will be explained. My own predictions are also very important.
What Was London Upgrade?
The London upgrade was of paramount importance to Ethereum, and that is what I need to explain. The ‘EIPs’ were Ethereum’s improvements and the name is self-explanatory.
It was EIP-1559 that had the most impact. A long-awaited EIP was designed to change the underlying Ethereum transaction mechanism radically.
Users would no longer be able to compete through a bidding system for block inclusion, which would be eliminated. Essentially, the miners were earning all of the transaction fees from the users who bid up the gas price.
Miners, however, often took advantage of this tactic by bidding up these fees, known as MEV.
EIP 1559 would modify how the amount of ETH is calculated with transactions and where it is spent. Essentially, the network demand would determine the base fee, which would be dynamic. By burning this fee, the ETH supply would be reduced.
There is also a priority fee on top of this. In the mining industry, this is also referred to as a tip. Set up a block of orders. Of course, You can read more about EIP 1559 by following the resources below that I have compiled.
It is the base fee that is the most important aspect of this EIP. In the absence of a significant impact on the number of fees paid, it would continue to react to network demand. In this case, however, it would be burnt meaning all participants would gain from it in the long run.
It was unnecessarily targeted at miners, they complained. Although they objected, the upgrade was carried out.
I was in London at the exact moment when block 12,965000 went live on the fifth of August. The upgrade was so important, and I hold a substantial amount of ETH in my portfolio, that I was nervous.
However, it all went according to plan. Tim Beiko, a core developer, posted this tweet.
The new code had been implemented by all mining pools and over 96% of all Ethereum nodes. Post-fork, there were no blocks mined on Ethereum’s old chain for the first time in its history.
The gas fee limits were precisely at 30 million, and the distribution of gas usage matched the models pretty well.
It may seem a bit complicated, but it proves how well planned and coordinated this upgrade was. It’s the beginning of ETH 2.0. I think we should be careful about jumping the gun on this – what it means for the token economy and usability of ETH has to be the most important question for us right now.
Impact of Upgrade
As base fees began to be paid, ETH was burned as if on cue. We have over 2,800 ETH burnt as of the time of this posting, which translates to 36% of all the ETH issued.
The inflation rate of ETH has thus been reduced from roughly 4.2% to 3%. This is not true deflation, but rather a drop in the inflation rate.
Because the miners still receive block rewards. The reduced emission rate, however, was caused by that burn.
Check out this graph over here to see how that looks. ETH should still benefit from this, of course. Let’s say you are willing to pay X for ETH before the
upgrade, but post-fork the scarcity price will only be worth more due to increased demand.
People attach so much importance to Bitcoin halvings for precisely this reason. Asset scarcity is impacted by the slowing growth of supply.
Additionally, less sell pressure should exist on the market. Miners tend to hodl more Ethereum than they actually sell immediately. Exactly because they expect a higher future value for it.
The price is less affected by less selling pressure from miners. That’s probably why ETH rallied post-fork instead of crashing as many expected.
As for the network fees, they didn’t change significantly. Although some users were disappointed, the upgrade did not aim to do that.
Usability is a benefit, though. The user now has two more transaction parameters to choose from rather than just paying a gas fee to move the transaction forward. Both the transaction fee and priority fee can be set.
In this case, it is the max fee they are prepared to pay. In addition to this, you will also receive a tip. A transaction will not be completed if the base fee is higher than the maximum fee.
The user can increase their specificity in terms of tipping by adding a maximum fee. Accordingly, when below the base fee plus the max priority fee, the buyer receives a refund.
I have included a couple of guides below that can help you better understand the new mechanisms.
Aside from that, user-friendly aspects of the new transaction mechanism include the fact that the user knows exactly, and can easily send, how much the base fee is. The fees they will pay for that block will be known in advance so that they can be certain about their transactions in future blocks.
Users of DeFi will naturally be able to appreciate this benefit more. However, the most exciting part of EIP 1559 is how it relates to ETH 2.0.
Ethereum ETH 2.0 Update
Most of you should be pretty familiar with Ethereum 2.0. Ethereum’s long-awaited upgrade to Proof of Stake (PoS) will take the cryptocurrency from Proof of Work (PoW).
We can also expect to see other scaling techniques implemented, including sharding. Below I have included links to some of my older videos on Ether 2.0.
There are three stages in the roadmap for ETH 2.0. As a beacon chain, we have already completed phase zero. The next stage is Phase 1, which is the Proof of Stake (PoS) merge. Now the Proof of Stake (PoS) stage begins.
With Proof of Stake, transactions will be much faster and transaction fees will be significantly reduced. Below is my complete post explaining the differences between the two consensus mechanisms.
Most likely, the ETH 2.0 merge will occur in the first half of 2019. A key consideration in this transition is how it could affect your burning and emitting of ETH.
Justin Drake, an Ethereum researcher, has created this spreadsheet. Justin Drake is one of the lead developers on Ethereum 2.0.
Using this spreadsheet, he has determined the burn rate of Ethereum and the supplied return for ETH post-merger. Here’s a quick rundown of it. I think you’ll find it to be quite illuminating.
Depending on what happens, there are a couple of scenarios that may arise. Here, March next year seems to be the best estimate. Since Justin himself used this one, I will also use it.
Here are just a few of the most important numbers. At the time of the merge, there was about 120 million ETH available.
Taking into account all the other variables, as the amount staked, the spreadsheet estimates that we will burn and issue 2.7 million ETH each year. In other words, ETH was burned more than the supply of new ETH. Therefore, it would be deflationary.
A declining supply of an asset. It has been branded ultrasound money by the developers of ETH. According to these projections, it will take about 11 years for ETH to reach a supply of 100 million ETH. Further, Justin reduced the selling pressure of ETH on the open market by accounting for it.
As a result of the upgrade, approximately 7 million ETH will not reach the open market. The price will react to the balance of buys and sells, of course. That number seems incredibly optimistic to me.
Several other scenarios are also available here which can be compared with these projections. We would burn about 1.3 million ETH even in a more conservative estimate. This would still make ETH deflationary if the issuance rate remains constant. 5.4 million ETH would also be reduced daily.
ETH could have a deflation rate of 1.4% after this merge. Inflation in the USD fiat currency is currently over 5%, while it is 1.8% in Bitcoin.
ETH is therefore considered ultrasound, as you see now. Obviously, these are only estimates. Based on current fee burn rates and staking growth, the model is built. In my opinion, the numbers are unlikely to change much.
In regards to the timing of the merger, I personally lean conservative. Especially with such a large open-source project as Ethereum, development work often takes longer than expected. Tech-wise, things are looking pretty good. The price of ETH will also be influenced by a number of fundamental factors in the coming months. Let’s look at some on-chain statistics.
Initially, I would like to check the exchange balance. This is because it provides a better idea of how much ETH is likely to be removed from the tradable supply. Let’s look at Glassnode’s metric for a moment.
The graph above shows that ETH held in exchange addresses has been on the decline since the start of the year. In today’s exchanges, we have fallen below 16 million from 19 million. It’s over nine billion dollars in ETH taken-off order books.
ETH isn’t just missing from exchanges. That’s what makes me most bullish about ETH. I am presenting exhibit B. The amount of ETH that has been held in smart contracts has been rising steadily throughout the year.
ETH may be used for supply liquidity, earning interest, or other types of yield farming in DeFi protocols.
The purpose of using ETH is to generate yield and to achieve a specific purpose. So the people who control ETH will be less inclined to sell it than those who have it sitting in their wallets.
In wallets with a balance of 32 ETH or more, this is the total supply of each.
Here’s why it’s important: this is the amount of ETH required for staked ETH on beacon chains.
The amount of heat staked in the beacon chain smart contract can further be checked. It currently stands at over 6.6 million ETH.
Even more consequential is that ETH currently locked in the 2.0 staking contract can not be withdrawn until a proof-of-stake merge occurs. It has been estimated by Justin Drake that this could happen as early as February, as laid out in his spreadsheet. This is more likely to be pushed to the first of April, as I mentioned.
The number will continue to rise as more and more ETH is introduced to the open market. Although the on-chain metrics look really good, the institutional space is acting differently. Last year, this was the dominant theme.
Wall Street Adoption
There is no denying that Goldman Sachs is Wall Street’s poster child, and the firm has been active in its commentary on cryptocurrencies.
In a recent internal note, Goldman Sachs said Ethereum could someday flip Bitcoin.
Based on what is cited in Ethereum’s description as “the most popular smart contract development platform,” this statement was made.
A number of years before Goldman offered a similar Bitcoin instrument, it decided to offer futures and options linked to Ethereum. This note’s context effectively clarifies this.
Another important report was the first half of this year’s institutional investor report from Coinbase. If you’re interested in reading the full report, I’ve provided a link below.
Nevertheless, I found it to be insightful in a few areas. It is amazing how much ETH has grown in terms of exchange volume. There were 92 billion transactions last year. It was 1.4 trillion this year. Just one year ago, the volume grew by 1,406%.
Several large institutional clients, such as hedge funds and endowments, added exposure to ETH in H1, believing it has long-term staying power, compared to bitcoin.
In addition, Coinbase recently released its second-quarter financial results. In the second quarter of this year, ETH trading volumes on their exchange surpassed bitcoin for the first time.
I also recommend that you take a look at Genesis Trading’s institutional report. Based out of New York, this OTC desk has been brokering regular institutional block orders for quite some time.
As you can see, Bitcoin’s trading volume has declined from over 80% at the end of Q2 last year to roughly 47% in Q2 of this year.
This presentation includes a graph comparing the BTC market cap to ETH. We can see it has fallen significantly since January, and this quote states “Shows the increased role of ETH in institutional portfolios.” Okay, so what does all of that mean for price?
With regards to ETH volumes, it’s a totally different story. This year, Etherum’s volume was more than 25% of Genesis’s Q2 trading volume, compared to less than 5% last year.
Even with the limited supply, ETH has a lot of demand. Several other factors can be looked at, however, to get an idea of where the market thinks ETH is going.
A look at the options markets is helpful when estimating asset prices in the future. These instruments are market-based and reflect the market’s attitude toward possible prices at expiration.
Here’s an interesting article on Coindesk that you might enjoy. Ethereum activity picked up quite a bit after the London Hard Fork went live last week.
As these options have an option to buy, their volume is bullish, given that they can be purchased. What’s interesting about this market flow isn’t just the kind of options being offered.
These options also have strike prices. Option strikes of 50K and 40K were the most popular for those expiring in March. Institutions mainly traded out-of-the-money call options on paradigm, proving that there are some extremely bullish hedge fund managers.
One thing that you can look at is how much calls are willing to cost compared to puts. A higher call price than a similar put with a similar sensitivity is obviously a bullish indicator. The option SKU is used to measure this.
The chart above shows the development of the ETH 25d Skew. Option SKUs have declined for a range of expiration dates. Essentially, this changes the price of calls versus puts across a variety of expiry dates. In the short term, bullish.
I‘m not a financial advisor and this article is simply for educational purposes. It should not be used to make any decisions regarding your finances. If you need investment advice, please contact a qualified financial advisor.