The three ethereum upcoming events related to the Ethereum blockchain, are the key points to rise the ETH price to the new ATH. Rollups, EIP-1559, and the “big” Merge are three key crucial points to improve the blockchain.
It seemed impossible, but it happened: Ethereum, which is the largest blockchain today, is moving more than 30 billion dollars a day on-chain, more than double the Bitcoin blockchain.
Much of this volume is tied to ERC-20 tokens, especially those belonging to the DeFi ecosystem.
Broadly speaking, DeFi stands for “Decentralized Finance ”, which means it is not regulated and stands apart from traditional financial ecosystems. In the not-too-distant future, should replace the traditional form of investment platforms such as banks and brokerages.
We have noticed that there has been a large reduction in transaction fees over the past few months. Overall, between January and June, the daily number of transactions on the Bitcoin blockchain dropped from 400,000 to 175,000.
Likewise, the number of daily transactions on the Ethereum network dropped from 1.6 million to 1 million between May and June.
Much of this was due to the general drop in the value of cryptocurrencies over the past month, mostly caused by whales and market entrants who are still not able to withstand the volatility well.
As a result, we have achieved a reduction in the total dollars deposited in the blockchain’s DeFi systems, as can be seen below:
What is the relationship between Ethereum, Ether, DeFi, and asset appreciation/depreciation?
It is essential to understand that these financial services use crypto actives and operate on algorithms in blockchains.
By connecting the loose information, we are able to notice that the relationship between DeFi and Ethereum valuation is meant to carry out transactions on these platforms, it is necessary to pay fees charged in Ether, the Ethereum platform’s native currency.
Ethereum, like any other blockchain, charges fees for its use . These fees serve to remunerate the miners responsible for approving each transaction.
In this blockchain (Ethereum Virtual Machine, EVM), the amount charged happens every time a transaction or smart contract is called gas. In short, this is the digital mechanism behind cryptocurrency, so that decentralized applications can work automatically.
Didactically, it is as if Ethereum were a bank (“bank X”) and all fees charged for transactions made within that bank could only be paid with the specific currency (“currency Y”).
It doesn’t matter if you have a coin that is worth a lot more, the rules remain the same.
In the example above, we have, therefore, that both are interconnected and that if more people start using “Bank X”, the volume and appreciation of “Currency Y” happen together, practically automatically – not to mention that such a structure favors the Supply vs. Demand Law that governs the free market.
In this analysis, it is cited the three main changes that tend to make the DeFi system start to be widely used, thus leading to a possible increasing appreciation of the ETH cryptocurrency.
It should be noted that the detailed explanation of the network’s improvements can be difficult for many to understand.
Beforehand, we suggest you continue reading through even if you manage to understand a little, as it will add to the knowledge background.
(Spoiler: there will be the main point of each change at the end of the article to compile the essentials)
3 events that can enhance Ether
The first important update is the release of the second layer solutions, known as Rollups.
These Rollups are designed to help scale and especially expand the scalability of the network, making the usability of some decentralized brokers (DEX), such as SushiSwap and Aave, more accessible and with virtually non-existent fees.
It is essential to pay special attention to scalability, as it represents the ability of a system or network to expand and manage growing demand.
The Second layer, therefore, is a secondary structure created above an existing blockchain system. The second layers of this network (Rollups) occur by handling transactions outside the Ethereum core network (layer 1), while taking advantage of the core network’s robust decentralized security model.
In a recent speech, Vitalik Buterin, creator of Ethereum, stated that Rollups are a “powerful” solution for network scalability in the “short- or medium-term (and possibly long-term) future as well.
They’ve seen a lot of enthusiasm from the Ethereum community because, unlike previous Layer 2 scaling attempts, they can support general-purpose EVM code, allowing existing applications to easily migrate.
Examples of second layers currently within the network are Polygon, OMG Network – formerly known as OmiseGo -, and Optimistic Rollups.
Implementing the whole blockchain scaling solutions such as Rollups is an advanced topic as the technology is less tested and continues to be researched and developed.
Why are they useful?
- They end up drastically reducing user fees;
- Promotes open participation;
- Fast transaction fees and transfers, happening in just a few seconds.
2. EIP 1559
Ethereum Improvement Proposals ( EIPs ) are standards that specify potential new features or processes for Ethereum.
In addition to providing a technical specification for changes, EIPs are the unit around which governance happens in Ethereum: anyone who frequents the community is free to propose some restructuring.
Then, various stakeholders present in this ecosystem debate to determine whether it should be adopted as a standard or even included in a network update.
The Ethereum enhancement proposal, EIP-1559, is one of five code changes that will be activated on the main Ethereum network. Furthermore, it is also one of the most awaited by its users. This update of ETH’s network promises to make the asset deflationary in times of high network usage, by burning the fees paid in transactions.
The EIP 1559 removes the transaction fees as a source of income for the miners and replaces the inclusion rate. With the update, the base rate will dynamically change depending on how full the block is at the time of each transaction.
The new proposal aims to keep network utilization at 50% or less. In addition, it introduces a new pricing mechanism for transactions based on a minimum rate called the “ base rate ”, which is automatically calculated by the protocol instead of being defined by the user.
For users or apps that want to prioritize their transactions, you will have the option to add a “tip”, which is called a “priority rate”, to pay a miner for a faster inclusion.
It is important to highlight that, currently, the average transaction rate on the network is of high cost! Each transaction spends around US$50 (depending on the gas price at the time), and its historical record was around US$70 (average) in mid-May 2021, something totally unfeasible and inaccessible for people with little capital or beginners.
Obviously, it was to be expected that the proposal would be highly contested by the mining parties because they felt it directly in their pockets, something that actually happened.
Overall, it is notable that the main advantage will be the deflationary shift in Ethereum’s economy. The idea is to make the tariffs based on demand for blocks more transparent to the user without the specific focus being actually the reduction of gas, despite its possible reduction.
With EIP 1559, there will be a fixed average price, putting an end to this uncertainty of values that end up having a lot of fluctuation.
Limiting currency inflation will make it as deflationary a digital asset like Bitcoin, meaning its purchasing power will only increase over time – which is why some users also label this shift as an Ethereum scarcity mechanism.
What should happen is a reduction in the supply of Ethereum in the market, with demand at least stable, but in an uptrend. This scenario should press the asset’s price up.
It is important to note that, recently, it was launched on testnet (test network) before its full implementation on the main network. The next step in the implementation of the hard fork London will be its deployment on the Goerli testnet, which is scheduled for June 30th.
Possibly, this solution should be launched later this year on the main Ethereum network.
3. The Merge
The migration of some cryptocurrencies to blockchains with the Proof of Stake (PoS) consensus protocol is a maturing movement in the market.
Today, Ethereum is experiencing the most important technological transition since its creation, in 2014-2015: the change in how its structure works, adopting PoS – which will culminate, in turn, in Ethereum 2.0.
This network, dubbed Ethereum 2.0, will maintain security through people who lend their tokens.
It is important to know that this network, until then, still uses the proof of work (PoW) system, that is, it depends a lot on the hash rate of its miners.
First of all, if this alphabet soup of “PoS” and “PoW” has caused confusion, rest assured and concentrate on knowing the following:
- PoW is a system that confirms movement by performing a mathematical problem performed by a miner. This takes a lot of computing power and a lot of energy consumption;
- The PoS system, on the other hand, consists of a miner leaving his crypto in the blockchain, and what he leaves for longer and in greater volume, takes the transaction commission. Thus, the PoS protocol is a consensus protocol in which stakes immobilize their positions in the network to keep it working. The advantage is that there is no need for a large amount of computing power and not even a large amount of energy consumed.
Those who staking the ETH token on the Ethereum network to serve as a “pillar” for Ethereum 2.0 can currently receive rewards of up to 23% per year.
However, according to the rules, you must have 32 ETH to be a validator. Also, as it’s not all flowers, another condition is that both deposits and rewards can only be withdrawn after the launch of phase 1.5 of the update, which is currently scheduled for 2022.
The amount of Ethereum (ETH) deposited in staking contracts for this update reached the mark of nearly 6 million, according to the graph prepared by The Block and, according to the explorer Beaconcha.in, there are currently 153,000 validators processing blocks in the update.
Furthermore, the use of PoS instead of PoW seeks to achieve greater efficiency, security, and scalability for a blockchain. With PoS, miners — who, remember, use computational power to validate transactions — are replaced by validators — those who left their tokens locked in the stake.
The system migration of the Proof of Work (PoW) for the Proof of Stake (PoS) should reduce by 4 times the RTH rate emission, in addition to increasing the freedom of developers.
Another interesting point is to know that Ethereum 2.0 was partially released at the end of last year and, since then, the update has been done in stages as the number of system participants and ETH tokens locked in the network grows.
In short, possibly “ The Merge” turns out to be the most truly exciting step to materialize the implementation of Ethereum 2.0.
Summary key point of changes:
- Rollups: are second-tier solutions. The purpose is to give Ethereum scalability;
- EIP 1559: promises to make the asset deflationary by burning the fees paid on transactions;
- The Merge: migration to Proof of Stake. It should reduce the ETH emission rate by 4 times.
As a result of all these new changes, I strongly believe that it will have an effect on the enhancement of Ether and Ethereum in the short, medium and long term, as has been happening since the first initial implementations.
In July 2020 the Ethereum was worth $234 and currently, even with the current +50% drops in the last month, each ETH is costing $2,100, a total appreciation of almost 900% in 12 months.
Finally, in addition to DeFi, it’s also important to know that Ethereum’s smart contracts are primarily responsible for creating new cryptocurrencies and developing blockchain video games.
Disclaimer: The information expressed in this article are solely those of the author and do not necessarily reflect the views of CryptoDeFinance. Each and every investment and trading move involves high risk. You should always conduct your own research when making a decision in crypto investment.