- According to Grayscale, the activation of EIP-1559 would be massively bullish for the Ethereum (ETH) price for three reasons.
- EIP-1559 remains on track for a mainnet implementation this summer.
Grayscale Investments, the world’s largest crypto investment fund with $30.4 billion in assets under management as of February 05, released a new report a few days ago titled “Valuing Ethereum.” Following the rapid rise of the ETH price from under $100 last year to currently over $1,600, Grayscale examines the question of the basis for the “value” of Ether (ETH).
As Grayscale states, Ethereum is younger than Bitcoin, while the protocol continues to undergo “significant transformations.” Because of this, the methodology for valuing the underlying asset, Ether, continues to be “opaque and changing. Considering Ether as money, as a consumable commodity, or as an interest bearing asset allows investors to account for a range of possible outcomes when assigning a fair value to the asset.”
According to Grayscale, however, EIP-1559 could provide a more clear basis for valuation. EIP 1559 is expected to introduce a new transaction pricing mechanism that includes a fixed network fee per block (“basefee”) plus an additional “tip.” This will involve burning the basefee and dynamically expanding/decreasing the block size to deal with temporary congestion.
The hope is that the introduction will discourage miners from manipulating transaction fees, which is also currently driving up fees. Instead of buyers and sellers setting the fees, the network would automatically generate a “base fee” price based on network activity. The base fee would be burned, while the variable portion of the transaction cost (the tip) would go to the miner.
EIP-1559 could pump the Ethereum (ETH) price
According to Grayscale, the implementation of EIP-1559 could have several bullish implications for the Ether price. First, the proposal would turn Ether (ETH) into “a consumable commodity through token burning,” which would serve as a “positive feedback loop for the price of Ether.”
Burning ETH with each transaction would act as “a deflationary mechanism.” This becomes particularly interesting when ETH consumed as fuel exceeds issuance by miners, as Grayscale elicits:
e. If activity increases and the supply of Ether decreases due to burning, a supply and demand curve would indicate an increase in the unit price of Ether because each unit would need to satisfy a greater proportion of economic activity
Since fees are paid directly in ETH, high fees would drive demand for Ether. During periods of high demand, the price could benefit greatly as a result of the feedback loop. In this regard, Grayscale states:
Notably, total transaction fees during January 2021 we nearly 5x the peak fees of January 2018. Yet, Ether’s price is approximately equal to that of the 2018 peak.
Further, the proposal supports Ether as the native asset of the protocol, “reducing the validity of prior analyses that Ether could be removed from the ecosystem.”
With the transition to Ethereum 2.0, investors will have the option to use Ether as a revenue-generating asset. Validators on the Proof of Stake network would receive the “tip” portion of transaction fees, unlike miners on ETH 1.0:
This is another key transformation in thinking about Ether’s value. Ethereum
2.0 will transform Ether from a commodity to what we might describe as a
productive commodity – holders will be able to generate interest by staking
Ether. This asset structure is unlike anything else in the physical world.
Commodities are consumed. Equities provide rights to cash flows. Under
Ethereum 2.0, Ether can be consumed as a commodity or staked as a claim on
cash flows, similar to equity.
Implementation of EIP-1559 on track for summer
As CNF reported, the proposal is facing significant opposition from Ethereum miners. Nevertheless, EIP-1559 could be implemented in the Ethereum mainnet as early as this summer, in a separate upgrade after the Berlin Hard Fork. Senior Product Manager at ConsenSys and Ethereum Core developer Tim Beiko revealed on Saturday about the current working status of EIP-1559:
As you can see on the list, there is only one issue outstanding. We have preliminary results indicating that it should be OK (https://hackmd.io/@timbeiko/1559-prelim-perf), but next week we’re running a proper test.
After that, I’d be comfortable proposing 1559 for inclusion to core developers. If everyone agrees, then it would be a candidate for the next network upgrade, and those usually happen every 6-9 months. We’ll probably have one over the summer.