Hello! Today we are discussing the most anticipated news of the most recent weeks in the world of cryptocurrencies – the new stage of the Ethereum 2.0 update. Somewhere you have already heard about it for sure! The Internet is full of rumors, and of course, I want to understand what will change on one of the most popular networks.
We were already considering updating ETH when Ethereum had just launched. So let’s refresh our memory on some of the main points before we go further.
We will not bombard you with technical terms and will instead tell you just about the main points.
WHAT IS THE PROBLEM WITH ETHEREUM?
Ethereum has been at the center of the cryptocurrency boom in recent years. And its popularity has grown significantly since the announcement of the upcoming changes. At the beginning of 2021, ETH rose to $4k and that bullish attitude showed several weak points.
As we know or are learning now, the end users’ main problem with the Ethereum network is low throughput (transactions per second), which results in high commission fees and long transaction confirmation times, otherwise known as the scalability problem. This problem was also recognized by the founder of the network, Vitalik Buterin, back in 2019.
For example, in May of this year, commissions on the Ethereum network exceeded $60, and the sites of some exchanges even failed due to network overload.
That is why Ethereum 2.0 is a solution that will allow developers to scale the original blockchain and make it more convenient for users. The main feature of the update is the transition of the network to the Proof-of-Stake (PoS) consensus, which will replace the Proof-of-Work (PoW) consensus on which the blockchain is currently running.
The main difference between PoS and PoW is that miners who generate computing power are no longer needed to maintain the network. The efficiency of the blockchain is provided by the holders of digital coins who receive a reward for this. This process is called staking.
And now let’s move on to the update on August 4.
It is called London update – these are the names of a set of updates, each known as an Ethereum Improvement Proposal (EIP).
What EIPs are there in the London version?
There are 5 of them in total: EIP-3554, EIP-3541, EIP-3529, EIP-3198 and the most important EIP-1559. The first four EIPs are not so interesting to us, because only professionals in cryptography and development will understand this set of numbers. It is EIP-1559 that is interesting to us simple Ethereum enthusiasts. Thanks to this update, the rules of the game for end-users will be changed, which, according to the creators, should ease the threshold for entering the world of Ethereum and increase the value of the product and the use of technologies and coins.
What is EIP-1559 and why do we need it?
EIP-1559 is the most important and interesting proposal. It is necessary in order to change the mechanism for awarding rewards to miners and reduce the cost of gas for users. It was the most controversial. Some miners reacted negatively to EIP-1559 and even promised to protest it, which eventually did not happen.
The most anticipated part of the update is the latter part, which was the most controversial.
The update of EIP-1559 consists of 2 parts:
1. changes to the principle of gas fees, which should reduce the cost of Ethereum transactions.
2. burning these fees instead of sending them to miners, which reduces the supply of ETH by about 1-2% each year.
Now for more details.
Currently, commissions are formed according to the auction model. That is, those who pay more will be the first to see their transactions in a new block. In general, this is what they want to change.
When you send your transaction on the Ethereum network, you basically see three ways to send a transaction: slow, average, and fast. These are based on recommended prices from services like ETH Gas Station, which tracks gas prices to help you know how much to spend.
And how does this affect the price of Gas?
When hype or any fluctuations in the price of cryptocurrencies occur on the crypto market, most users try to move their assets or withdraw them. And it turns out that the amount of demand is much greater than the supply.
many people conducting operations on the ETH network
high number of transactions per second (high demand)
the user must offer more commission in order to have time to complete the transaction and make profit off the hype
Does it look a little unfair to users? Especially for beginners, who may not know the subtleties of the commission fee and get into a drawdown when they try to move their coins. In moments of excitement, netizens shared their commissions, which were even more than $100 per transaction.
The new method of accrual of remuneration will have to solve this problem. It will look like this:
Thanks to the EIP-1559 update, the commission fee will be based on the base commission, which will adjust their fees depending on demand (through a clever mathematical algorithm). After the transaction is completed, the base commission will be burned, and not sent to the miner.
But what will the miners get?
You will be able to add “tips” before sending the transaction and they will be sent to the miners as a reward. The question is, why should miners work “for free”? And because transactions with and without tips will now be filled 50/50, the miner will have to carry out both types of transactions, otherwise, the transition to another block will not be carried out. And as you know, miners receive a reward from the network itself precisely for the formed block.
Summing it up, it can be assumed that Ethereum mining will be reduced in the future, but for now, it will go on in this mixed manner. When the transformation of Ethereum 2.0 is complete, burning the base fee will help reduce the amount of Ethereum, ultimately making it even more valuable and rare.
Have you caught the essence?
So, what will we, the users, get at the output?
As we have already said, after burning the basic transactions, i.e. Ethereum, the number of coins in circulation will decrease. And as many Ethereum optimists expect, this means that their value will increase. The demand for Ethereum is already large, and with such innovations it can grow in the coming years. As the developers themselves say, Ethereum will become a deflationary asset.
Of course, not everyone is so optimistic about the future of the financial system led by Ethereum. There are many pitfalls, for example, questions about the remuneration of miners and the real possibility of ETH surpassing Bitcoin.
But still, Ethereum now occupies a leading position in the market, increasing its importance every year. Really? Really. What does the platform not do? It has NFT, dApps, DeFi and games, and many other interesting things. And who knows what else they can come up with in the coming years, but they will definitely not stop there. Hence why they came up with Ethereum 2.0. Okay, jokes aside.
Ethereum in reality is very much promoting the usefulness of cryptocurrencies for all mankind and for this, it is worth saying a huge thank you to the guys.
This article is for informational purposes only and many technical details have been omitted. You can always offer us your topic on social networks, and we will try to answer all your questions on the world of crypto technologies!