With the Eth2 merger approaching, Ethereum is in full deflationary mode

The Ethereum community has been working hard in the past few years to lay the foundation for its move away from the current Proof of Work (PoW) algorithm, which has been the backbone of blockchain operations until today.

Ethereum’s shift to its Proof of Stake (PoS-) driven Ethereum 2.0 chain is gradually approaching reality, and recent updates to its blockchain have led to the issuance of Ethereum (Ethereum) Became deflationary.

The recent upgrade has resulted in The deflationary issuance of ETH, Part of the transaction fee burn has exceeded the issuance of new ETH through mining. Before the network was upgraded to Ethereum 2 (Eth2), some people in the industry did not expect this to happen. This is expected to be an important factor driving the value of the underlying cryptocurrency to rise in the coming months and years.

In terms of its impact on the value of ETH, the impact of this earlier-than-expected change on the deflationary issuance of ETH cannot be underestimated. In addition, industry participants believe that once the network fully transitions to Eth2, this deflation will intensify, which is more than 10 times lower than the current issuance of 2 ETH per mined block.

Recent development

At the end of last year, with the launch of the proof-of-stake beacon chain, the foundation was laid for the transition to Eth2, allowing users to pledge Ethereum to become validators. This will fundamentally replace the current role of miners who use physical hardware to verify transactions, add new blocks, and maintain the network.

As of November 17, 2021, more than 260,000 validators have mortgage The minimum required to become a validator on the chain is 32 ETH. At the time of writing, the current amount of collateralized Ethereum tokens is 8,327,638 ETH, valued at approximately 34.1 billion U.S. dollars.

The value of Ethereum has been on a steady upward trend in 2021, and Set a new high This year was driven by a variety of factors, including the explosive popularity of the decentralized finance (DeFi) space, a large part of which runs on the Ethereum blockchain.

this The most anticipated upgrade 2021 is the London hard fork, which introduced some Ethereum Improvement Proposals (EIP). Due to changes in the fee structure earned by miners and paid by users, a special proposal EIP-1559 is a point of contention.

One pain point is the built-in ETH destruction mechanism, which destroys part of the ETH used to pay transaction fees. Given that transaction fees are the driving factor that motivates miners to maintain the network, this angered Ethereum miners before the upgrade.

related: The Bitcoin Taproot upgrade improves the network because the BTC price may have limited impact

An important benefit of the London hard fork that occurred in July 2021 is the deflationary behavior of the ETH destruction mechanism. Now every transaction will see a certain percentage of ETH being destroyed, gradually leading to more ETH being removed from the ecosystem, which should increase the scarcity and value of ETH as an asset.

London has also been touted to see a reduction in fees paid by users of the Ethereum network. This possibility has not been fully realized, and high costs are still a concern in November 2021.This has already made some investors look forward to Utilize multi-chain decentralized financial network In order to alleviate the high transaction fees that still exist on the Ethereum mainnet.

The latest upgrade to the Ethereum network after London is called Altair. Tim Beiko, the community manager of the Ethereum Foundation, told Cointelegraph that Altair is the first update of the Beacon Chain since its launch in December 2020.According to him, this upgrade is not only a test of the merger, but also for Align Incentives for validators:

“The upgrade raises the penalties that validators receive when they propose invalid blocks or go offline to their’real’ level. When Beacon Chain was launched, these penalties were lowered in order to be more tolerant of gamblers in the early days. Now we know the matter. It can operate reliably, and it’s time to raise the penalty to a true level.”

Ben Edgington, chief product owner of the Eth2 client Teku created by ConsenSys, also weighed the complexity of the Altair upgrade: “We have never done this before and want to make sure everything goes well before we do a large-scale upgrade. When we turn Proof of equity.” He added: “The progress is very smooth, and we are confident that we can coordinate future upgrades.”

Edgington highlighted some of the major changes introduced with Altair, while acknowledging that most of these upgrades are general improvements that may not have been noticeably obvious to punters.

According to Edgington, the synchronization committee was introduced as an enhancement that will allow light clients to sync trustlessly with the state of the beacon chain, making it “it is possible to have something like an in-browser wallet in the future, no Rely on any trusted third party.”

Block rewards have also been fine-tuned based on internal calculations. Proposing a block will now receive higher rewards and more technical changes, while the pledge reward remains the same.

Finally, an important change was made to reduce penalties. When the beacon chain went online last year, the penalty threshold was lowered. Slashing is used to prevent improper behavior of verifiers on the network, such as being offline and therefore unable to sign transactions. As Edgington explained, there is now enough time to judge the effectiveness of the mechanism:

“The reduction penalties were reduced at the beginning of the beacon chain to increase the confidence of punters. Now we are all more comfortable with staking, and the penalties are gradually increasing to their value of’encrypted economy correct’.”

Multiple representatives from the Ethereum customer team Separate In October at a seminar called Amphora. The team worked together to execute a series of development milestones to simulate the Eth2 merger on the testnet — effectively serving as a rehearsal for real things sometime next year. Edgington analyzed the results achieved at the seminar and made the best estimate of the transition to Eth2 sometime in the second quarter of 2022.

“We are now working on a public merger testnet called Kintsugi, which is scheduled to go live in early December next month. Kintsugi aims to implement the candidate version design for The Merge, which means that the technical implementation work has basically been completed. After that, the merger Only one testing, risk management and governance process is needed before it happens.”

Now focus on “merging”

Eth2’s roadmap is planned for another minor upgrade in 2021. Arrow Glacier consists of a single EIP-4345, which changes the parameters of the so-called Ethereum Ice Age difficulty bomb.

The difficulty bomb is the name of the difficulty level that miners plan to increase in the current PoW Ethereum mainnet. When Bomb goes online, the mining difficulty of the Ethereum network will increase exponentially at a certain threshold, and it will become one of the driving factors that motivate the entire Ethereum network to participate in the merger with Eth2.

Beiko stated that the main focus of the broader Ethereum development community is now completely focused on “merger”, which marks the beginning of the last chapter of the blockchain’s evolution to PoS consensus.

What will happen when Eth2 becomes a reality

Although the exact date of the “merger” has not yet been determined, both Beiko and Edgington emphasized the fact that Ethereum developers are now only focusing on the final steps of implementing Eth2.

Nevertheless, many cryptocurrency users and enthusiasts are asking the same question. What will happen when Eth2 becomes a reality? Edgington gave some insights on how the network will work with various second-tier solutions that provide scalability improvements:

“The move to Proof of Stake will not immediately provide any significant additional throughput to the Ethereum chain, so I don’t think it will have a measurable impact on gas prices. The scalability strategy in Ethereum now revolves around the second Layer solutions, such as the various aggregations currently being deployed. Once the merger is completed, we will focus on providing data sharding in the Ethereum protocol, which will allow aggregations to scale on a large scale.”

Edginton also pointed out that due to the cancellation of mining block rewards, the amount of Ether issued per block after the merger will be reduced by 2 ETH, and EIP-1559 will continue to burn Ether like today: “Therefore, in the foreseeable future, The total supply of ether is likely to decrease.”

Coinbase’s protocol expert Viktor Bunin emphasized the importance of the London hard fork and its widely controversial EIP-1559 earlier this year. The mechanism of the upgrade launch gives some ideas about how the value of ETH will change as the deflationary mechanism accumulates, telling Cointelegraph:

“Since its launch, EIP-1559 has reduced the net issuance of Ethereum by 66%. If the merger takes effect today, the net emissions of ETH will actually be negative, causing the network to deflate. EIP-1559 and operational verification The key to the device is to make the asset ETH more useful. Before that, ETH only indirectly captured the advantages of Ethereum. Having directly measurable indicators will help industry participants understand the value and utility of holding and using ETH. .”

These views were echoed by Yuga Cohler, a software engineer at Coinbase, who delved into these figures and outlined in a data-driven way the impact of EIP-1559 so far and how this will continue when the merger finally occurs: “In U.S. dollars Despite this burn, the terms actually increase by 33%. As validators replace miners, more ETH is collateralized—and therefore, at least temporarily locked—to protect the network, and the greater scarcity of ETH Will become part of its value proposition.”