Ethereum has undergone several pivotal changes in 2021. Last year, towards the end of Q4 2021, It launched its ETH 2.0 beacon chain, initiating the first step towards its network propagation to a Proof-of-Stake protocol. While the asset witnessed a lucrative year in 2021, it continued on major developments. London Hardfork went live in August 2021, introducing the fee burning mechanism but the functional changes aren’t straightforward.
Over the next few months, Ethereum will undergo the completion of ‘The Merge’ which may re-structure its capability. However, it is essential to understand the changes to understand its evolving tokenomics.
Ethereum London Hardfork and Improvement Proposals
Ethereum’s London hard fork included four other EIPs other than EIP 1559. It included, EIP 3554, EIP 3198, EIP 3529, and EIP 3541. Each EIP constitutes an integral part of Ethereum’s PoS network.
EIP 3554 is responsible for the difficult bomb delay which expires next month on December 1st. After that, difficulty in Ethereum mining would increase substantially, to prepare the network for the merge.
EIP 3198 gives Ethereum Virtual Machine access for the new PoS network, and EIP 3529 currently eliminates and reduce gas fee refunds. Lastly, EIP 3541 is employed to restrict old OxEF addresses, which isn’t compatible with the new PoS chain.
EIP 1559 is responsible for base fee and fee burning mechanism, which is our next point of discussion.
Becoming Deflationary with reduced ETH supply
According to Ki-Young Ju, CEO of Cryptoquant, Ethereum’s supply might not increase anymore.
Ethereum’s supply rate of change has dropped down to zero over the past few weeks. Now, while this things are taking place after the London hardfork, it is causing a permanent change in the token dynamics. Considering, Ethereum supply reduces with respect to the amount of tokens burned, the demand will rise against the supply.
At press time, 8.3 million ETH has already been burned, worth over $3.7 billion. That is reduced liquidity, raising the intrinsic value of the existing supply. It is inevitable that the price of Ether rises with respect to reduced supply, and increased demand, and the completion of Merge will enfored such a narrative.
Final thoughts
While Bitcoin is deflationary by nature, due to its restricted 21 million supply, Ethereum is based on improved tokenomics. Both assets will functionally co-exist but with Ethereum, there is thriving ecosystem which is developing the blockchain industry for the future.