What Makes Ethereum a “Deflationary Asset”?
Recently, Ethereum has just completed the Berlin hard fork, involving the optimization of the mainnet performance, smart contracts, and gas efficiency as well as updates in how the Ethereum Virtual Machine (EVM) reads code.
The progress of Ethereum 2.0, which is hailed as the king of the public chain, has always been in the spotlight. With the smooth completion of the Berlin hard fork, the London upgrade, the next important hard fork event, is coming in July, and the widely discussed “EIP-1559” will also be executed at that time. If everything goes well, ETH may enter a new era of deflation, making itself a deflationary asset.
“Deflation”, as the name implies, is a reduction in the amount of currency in the economy. By then, the circulation of ETH in the market will be less than the amount required for actual circulation, which will cause the price of ETH to rise.
Two major mechanisms turn ETH into a deflationary asset: on one hand, after the execution of the EIP-1559 proposal, a certain amount of ETH will be burned for each on-chain transaction; on the other hand, the amount of tokens produced will decrease after the switch to the ETH 2.0 consensus mechanism.
However, not all supporters of Ethereum go for the EIP-1559 proposal. The miners are even divided into two camps. One side strongly opposes the EIP-1559 proposal because they believe it will lead to a significant drop in mining revenue.
Let’s do the calculations:
The current hashrate of the entire network is 520,000 GH/s, the average block time is 14 seconds, and the block reward is 2 ETH, then:
New blocks generated every day: 60*60*24/14, about 6,172 blocks;
The actual amount of ETH produced every day: 6,172*2=12,344 ETH
Current daily income: 1MH/s*24H=0.00005ETH
Daily income of the entire network (including gas): 520,000*1,000*0.00005=26,000 ETH
ETH produced every year: 12,344*365=4.5 million ETH
From the above calculation, it is clear that the daily mining income (26,000 ETH) of miners across the network is more than twice the actual token output (12,344 ETH). That is a telling evidence of the considerable gas fee at the moment (including the block reward).
In the EIP-1559 proposal, the transaction fee is divided into two parts: the basic fee and the miner’s fee. The basic fee will be burned, and will no longer go to the miners. Once the EIP-1559 proposal is executed, the miners’ transaction fees will plummet, no wonder some of them strongly oppose this proposal.
Yet for the long-term development of Ethereum, the EIP-1559 mechanism will stabilize the gas fee on the Ethereum chain, thus favoring the Ethereum ecosystem and Ethereum holders in the long term.
According to the plan, after the Berlin upgrade and the London upgrade, Ethereum will “merge”, or in other words, the consensus mechanism will be switched from Proof of Work (PoW) to Proof of Stake (PoS), and the issuance volume will be reduced.
In fact, as early as two years ago, Justin Drake, a researcher at the Ethereum Foundation, said:
“Ethereum (ETH) might decrease issuance ten-fold by 2021.” In other words, the amount of ETH produced will be reduced by 90%, and the block reward of Ethereum will see a steep fall.
Assuming that the current reward for each block is 2 ETH, that means, after the ETH 2.0 upgrade, the block reward will drop to only 0.2 ETH, a 90% reduction. If you are optimistic about Ethereum, you need to get ready for that as soon as possible.”
Another piece of good news: Recently, ViaBTC will launch an “ETH Mining Carnival” to benefit miners. Stay tuned for more surprises and benefits in the specific rules in the official announcement.
In summary, there are two main reasons behind the recent ETH rush:
One is the expectation of the price increase after the ETH 2.0 upgrade; and the other is the sharp drop in token production after that.
If Ethereum 1.0 is trying to build a world-class decentralized computer, then Ethereum 2.0 will be a world-class decentralized computer in the true sense. Once the ETH 2.0 upgrade succeeds, the performance of the Ethereum mainnet is bound to be greatly improved, with higher on-chain carrying capacity and faster efficiency. At that time, Ethereum will truly realize its great vision of “being the world-class decentralized computer” to offer infinite possibilities for large-scale commercial applications scenarios.