There’s exciting news in the crypto world.
A brand-new protocol is completely changing the way people buy, sell and trade Ethereum.
This will have a HUGE effect on every blockchain-based project out there, from decentralized finance to non-fungible tokens to cloud storage and more.
In today’s Market Insights video, Steve Fernandez and I discuss why this could be the catalyst that sends the price of Ethereum and other cryptos even higher.
(If you’d prefer to read a transcript, click here.)
Ian King: Hey everyone. Ian King here, back from the metaverse with your weekly Market Insights video.
Today, I’m joined once again by my colleague and friend Steve Fernandez. Steve, how are you doing out there?
Steve Fernandez: I’m doing great, thanks.
What Is EIP-1559?
Ian: Let’s talk about the big news this week in Ethereum land.
There’s this huge upgrade, this hard fork to the network called EIP-1559 that happened today to Ethereum.
Steve, can you please enlighten our viewers exactly what this is, and then we’ll talk a little bit more about what it means for Ethereum.
Steve: Yeah, so, the Ethereum Improvement Protocol is what you just described in a fancy way. And it’s an upgrade to the way that “gas fees” are determined.
So, basically, a gas fee is how much a user of the Ethereum network is going to pay to have their transaction verified. In the past, there was an auction system where users of the network would essentially bid in an auction format to determine how quickly their transaction would be processed by the network.
That could end up having some effects where you’d have really aggressive bidding, or people that just wanted things processed quickly, and you would see very extreme gas fees at given points.
Now, with this new update, that gas fee is determined as a base fee where, based on the network activity, there’s an algorithm that generates a base fee. And now to try to get your transaction processed sooner, you can actually just tip the miner.
So, that’s the first aspect of the update. The second aspect of the update, which the market seems to be pretty excited about, is now, when you pay these fees for your transactions, they’re burning that Ethereum. So, what that does is it creates a deflationary effect. Or, in other words, it’s reducing the supply of Ethereum, which generally results in higher prices.
You know more than anyone that this could have pretty big effects on Ethereum adoption.
Gas Fees
Ian: Absolutely. And just to take a step back for a moment, I want to explain gas fees and how I think people should think about them.
Imagine the Ethereum blockchain protocol as sort of like a digital road or digital piece of infrastructure. Like the real world, if you’re driving down Interstate 95 and you come to a tunnel, you know exactly what that toll is going to be.
Now, throughout most of Ethereum’s life, on the tolls that you paid, you never really knew what the price was going to be. It was always priced as to how congested the network was. But now with this proposal, and specifically to what you’re saying, the tolls are going to be known. We’re going to know how much the tolls are.
And not only that, when you pay the toll to use the network, they actually just burn the token, meaning they take the supply out of the market, which is common or simple economics. If you have a supply that’s coming down and demand is staying the same, then the price goes up. Right?
So, there’s going to be a demand-supply equilibrium, which is why I think we’ve seen about a 50% rally in Ethereum over the last couple of weeks as excitement for this Ethereum Improvement Protocol 1559 takes effect.
I mean, do you think that’s the right way to think about it, Steve?
Steve: Absolutely. And I would even take it a step further. I think it not only will demand to be held constant, I think it will increase.
Now you have new developers and users that are attracted to the Ethereum network because they can have a better idea of what fees they’re paying. In the past, it was hard to scale an application when you may have a surprise one day where you had to pay a lot in fees. And that can really negatively impact these applications’ scaling and being really usable by the masses.
But now the developers of these applications can pinpoint exactly how much they’re going to be spending. And that makes it easier to build more robust and even lower-fee applications for users.
I think demand will actually increase, and that would potentially help prices even more.
Ian: And let me give our viewers an example of how the fee is going to help out some of these applications you pointed out.
Take decentralized finance, for instance. This is basically a new era of finance built on the blockchain that allows people to transact two digital items without having any history of each other and having no central intermediary.
Think about decentralized finance as if decentralized exchanges are sort of like the New York Stock Exchange. But instead of transacting on the floor of the New York Stock Exchange, I’m trading my cryptocurrency on a smart contract with another user who I want to buy something from, and they want to sell it.
Now, Ethereum is necessary because you have to pay that little toll to make the transaction happen, to power that smart contract. And in the past, when the markets have gone haywire, they’re going either going down a lot or going up a lot, the price of that toll goes up exponentially.
And I think, Steve, you have a chart that you might want to share with our viewers now.
Steve: Absolutely. Yeah, in this chart, you can see that the gas fees over time, as I described earlier, are fluctuating a lot.
Now, there’s normally a period during a day where gas prices will be generally higher. That’s around noon. But over time, if you look at this chart, there are just huge extremes. And I expect this to be a little tighter, meaningless extremes in the chart from here on out now that this update has hit today.
So, it should be interesting to see that.
Ian: And I can tell you from my own experience, I know some of my subscribers to my crypto newsletter have had the same thing.
When the market’s going down or it’s going up and you want to use the decentralized exchange to get in or out of a position, you could be transacting $1,000 worth of cryptocurrency, and the gas fee is, like, $100. OK? So, you’re paying a 10% fee just to do a trade.
I mean, that’s highway robbery. That’s what the New York Stock Exchange used to do to traders, like, way back in the day. This isn’t the future of finance.
I love the new protocol and how not only is it going to get supply out of the market, but also how it’s going to give less price volatility in terms of how much gas you pay.
But I think the bigger picture here for where we’re heading with Ethereum is the “ETH 2.0” roadmap.
It started last November when they opened up ETH 2.0, where you actually stake your Ethereum on the network. This is another improvement protocol that’s going to limit the volatility of gas fees.
What Is The Future Of Ethereum?
The future of Ethereum really is moving from what’s called proof of work to proof of stake.
And that’s going to make Ethereum lightning fast. It’s going to handle over 100,000 transactions per second, which is, like, 500 times what the network can handle right now.
That’s how we’re going to get to a world where we can take all traditional finance and put it on the blockchain to cut out the middleman, cut out the fees, you know, take the power away from the banks and let people unlock the value of their own assets. And today’s move is just one stepping stone along the way.
So, Steve, are you excited to trade more on decentralized exchanges now that the volatility has been cut down?
Steve: Yeah, I mean, they’re more predictable, so you can be more opportunistic about when you trade.
And also, if you’re actually investing in Ethereum as a token, the new proof of stake consensus mechanism, which is ETH 2.0, enables holders to earn staking rewards by holding their tokens.
So, you know, I think that’s a long-term driver for the investment value in Ethereum as well, not just participating in the network.
Ian: Exactly. And it’s not just decentralized finance.
I mean, we’re looking at protocols for decentralized cloud storage and network bandwidth usage. All different types of digital applications that are moving to the blockchain. That’s why this space is so exciting — and one of the best places to invest for the next 10 years.
For myself and my colleague Steve Fernandes, have a great weekend, and we’ll speak to you again next week. Thank you.
Regards,
Editor, Strategic Fortunes