Ethereum (ETH) is changing. Not only is it undertaking the gradual process of transitioning to a proof-of-stake (PoS) consensus mechanism, but it’s only a couple of months away from significantly revamping its monetary system, via Ethereum Improvement Proposal (EIP) 1559.
EIP-1559 proposes to split Ethereum gas fees into two parts: a tip which can be set by a transaction’s sender, and a base fee which is then burned. It’s this latter element which some have claimed will transform ethereum into a deflationary cryptoasset, and, according to the ETH camp, make it a serious store-of-value rival to bitcoin.
According to industry players speaking with Cryptonews.com, this shift may not occur overnight, with Ethereum needing to move fully to PoS before the deflationary aspect of EIP-1559 really kicks in. Some analysts also suspect that Ethereum might not reach the level of traffic whereby token burns outpace inflation.
‘Only time will tell’
Developer Ryan Berckmans explains that EIP-1559 will result in most gas fees being destroyed, although the effect likely won’t be instantaneous.
“EIP-1559 is expected to burn an estimated ~70% of fees, that's the deflationary pressure. However, when EIP-1559 launches on July 14, ETH won't immediately become deflationary because the proof of work mining will continue producing net inflation until Ethereum switches to proof-of-stake this year,” he told Cryptonews.com.
However, inflation will likely turn negative when Ethereum 2.0 is finally rolled out.
“After switching to PoS, ETH is expected to be deflationary because the amount of ETH expected to be burned by EIP-1559 greatly exceeds the total expected inflation from PoS which is <1% inflation,” Berckmans added.
Not everyone agrees with this prediction, with some arguing that Ethereum could become deflationary even before PoS, and some arguing that burned ETH won’t outnumber newly minted ETH (via block rewards).
“The deflationary effects of EIP-1559 should be noticed immediately and will become even more prevalent when Ethereum moves fully to proof-of-stake,” said blockchain company ConSensys’ Lex Sokolin.
He added that, the more transactions that occur, the more deflationary the burning of the base fee will be. On the other hand, eToro analyst Simon Peters isn’t convinced that fee burning will consistently outweigh inflation.
“In my opinion this is unlikely. Given that there are Layer 2 solutions such as rollups being developed to help scale the current Ethereum blockchain and ease congestion on the network, I don't foresee the congestion reaching a point that it becomes deflationary. But only time will tell,” he said.
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