7th September 2021 > > Ethereum.

tl;dr

The London hard fork removes the inflationary element of Ethereum.

Market Snap

Market Wrap

Steady as she goes, this gentle climb towards the mid-50s looks unstoppable for now (cue a sell-off later today …)

Occasional Series – The European pendulum swings

With Mutti Merkel’s retirement, polls suggest that following the election on September 26th for the first time in 16 years, Germany will not have the conservative CDU dominating a coalition government, or even in government at all.

In 2022, does anyone seriously believe that Macron will be returned to power? Since the establishment of the Fifth Republic in 1958 and universal suffrage in 1965, only Presidents Mitterand and Chirac have been re-elected as sitting Presidents, in 1988 and 2002 respectively.

France seems very likely to move politically in the same direction as Germany.

This does suggest to me a greater degree of co-operation between the two European heavyweights, much to everyone’s benefit.

Curious Cryptos’ Commentary – ETH and the London hard fork

As a quick recap, ETH 1.0 is undergoing two fundamental changes on its way to ETH 2.0, as discussed on many occasions in the CCC.

The mining process is moving from proof-of-work (POW) to proof-of-stake (POS). BTC is famously built using POW in which miners compete with one another to produce the next block. There has been some considerable criticism on environmental grounds – and some valid rebuttals of some of that criticism - because of the energy demands inherent in POW.

POS uses a fraction of the energy required for POW, as only one miner at a time is ever involved in mining each individual block.

Currently, ETH runs on two blockchains, one POW and one POS, the latter known as the Beacon chain. Only the former is actively managing the overwhelming majority of transactions, but Beacon chain is alive and kicking with over $15bn of ETH staked to maintain its immutability. The grand plan is to merge the two chains later this year, an IT project which will keep a few people up at night.

The second change is a move to a concept known as sharding. Essentially transactions will occur across many different chains, with ETH that moves to a different chain being wrapped and locked in the original chain. This is a very similar concept to the process by which Layer 2 solutions work (see CCC 2nd September 2021) and prevents the issue of double spending.

[As an aside, the concept of wrapping is one of the truly innovative creations that have been enabled by smart contracts. Just by itself, wrapping will be transformative in our lives.]

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The London hard fork was one of the milestones to ETH 2.0.

Part of this was the introduction of EIP-1559, a new protocol that introduced the concept of a base fee. Previously, miners received 2.1 ETH per block mined plus the transaction fees. Now, the base fee is taken out of the transaction fees and burnt (this is achieved by sending the base fee to a wallet for which the private keys have been destroyed/lost/fed to the dog).

The idea is simply that by reducing the miner’s rewards, they will be keener to move to POS from POW, despite their huge investment in rigs designed for POW.

An ancillary benefit is that it reduces the inflationary tendency of ETH, which theoretically should have a positive impact on the price action for ETH.

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The London hard fork was introduced on August 5th 2021. Since that date over 200,000 ETH have been burnt, equivalent to more than $800mm. That has got to hurt the miners.

With a market cap approaching half a TRILLION dollars that means that nearly 0.2% of total ETH has been taken out of circulation, an amount so small that any impact it has on pricing is lost in the normal volatility of crypto prices.

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ETH fees remain high at around $25 for just a transfer, and $75 for a simple DeFi swap. NFTs can cost hundreds of dollars to process. OpenSea, the largest NFT marketplace, can often account for more than 10% of all ETH fees in any 24-hour period.

With such high fees, there have been days recently when the amount of ETH burnt is greater than the amount of ETH created by mining each block.

That is truly deflationary and must surely have an impact on pricing.

…

Since the London hard fork, BTC has rallied from $39,200 giving a 35% return.

Since the London hard fork, ETH has rallied from $1,950 giving a 46% return.

I have every expectation that this outperformance by ETH will continue.