How Will the London Hard Fork Affect Ethereum Price?
One of the most anticipated upgrades to the Ethereum protocol introduces a burning mechanism which will make Ethereum a deflationary asset.
Ethereum’s Price Prediction
The London hard fork of Ethereum will commence on August 5th. The blockchain will undergo a number of changes during the upgrade of the network.
The update, officially titled Ethereum Improvement Protocol 1559 (EIP-1559), focuses on making transaction fees more predictable. EIP-1559 also introduces a token burning mechanism - the network will automatically burn portions of transaction fees.
“EIP-1559 changes this mechanism by setting a "base fee" paid to miners for each transaction, part of which will be burned,” Reuters journalist Gertrude Chavez-dreyfuss explained.
This serves as a deflation mechanism, aimed at keeping the price of Ethereum from reducing in value.
Understanding EIP 1559
This upgrade changes Ethereum’s fee market mechanism. There are a few problems that EIP-1559 aims to solve. It aims to reduce volatility of transaction fees by doing away with the first price auction mechanism. Instead a base fee is introduced.
The user can prioritize a transaction by paying a tip, dubbed as a ‘priority fee’. The base fee can increase or decrease by 12.5% based on the size of block to give more predictability to the fee mechanism.
What Investors Are Concerned About
Investors are mainly concerned about how the London hardfork will affect the price of Ethereum. Andrew Keys, the Managing Partner of Dharma Capital in early July Tweeted that Ethereum may overtake Bitcoin in the next 3 quarters. He confided to Reuters that EIP-1559 and another upgrade in the first quarter of 2022 could quintuple the price of ETH.
Finder, an investing companion application, made a prediction that Etherum will be at $4,596 by the end of the year and $17,810 by the end of 2025.
EIP-1559 will go live at block 12,965,000 on the Ethereum blockchain. EIP 1559 is estimated to reduce issuance of new coins by 90% which is equivalent to 3 halvings of Bitcoin.
Burning Fees and Halvings
The burning of fees is regarded to have almost the same effect as halvings do for Bitcoin.
Traditionally, Bitcoin's halving cycle has always sparked off a rally. Bitcoin was trading at $8,800 when halving took place on May 11, 2020.
At the time of writing, Bitcoin is trading at approximately $38,000. Although halving is not the only factor that led to appreciation in price for Bitcoin, historically, Bitcoin has a strong correlation with the halving cycle.
Why Miners Are Concerned
This burning mechanism, although generally welcomed by the crypto community, has received a lot of opposition from miners. After the hard fork, miners will not receive any of the base transaction fee.
While miners may not be pleased, there are benefits to the transition. Where Ethereum’s price is in five years is impossible to predict - but investor sentiment is positive.
Ethereum’s Value Has Multiple Factors
There are a few factors that will drive up the value of Ethereum. The scarcity of Ethereum will increase with time based on two main factors. First, Decentralized Finance (DeFi) continues to grow at a steady pace. This has resulted in more Ethereum being locked up in liquidity pools and smart contracts as many projects are built on Ethereum.
The total value locked in DeFI currently stands at $68.81 billion. This will likely grow as institutions adopt DeFi and the industry goes further mainstream.
Secondly, with Ethereum 2.0, long term investors are locking up their Ethereum by participating in the ecosystem by becoming validators. Ethereum will be moving from a Proof-of-Work (PoW) protocol to a Proof-of-Stake (PoS) protocol which will effectively remove all mining activities.
5.57% of its circulating supply has been locked in staking contracts. This will remove more assets from being actively traded and create an upside pressure to the price of the asset.
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