Exactly one year ago, on September 15, 2022, the Ethereum network implemented a fundamental update: The Merge. The main change in this update was the migration in the consensus algorithm, which changed from Proof of Work (PoW) to Proof of Stake (PoS).
In almost a year, the Ethereum network has undergone several changes, especially in the offering of new tokens. And indeed, Ether (ETH) has become deflationary in the long run.
More token burns
Since the launch of The Merge, the Ethereum network has created 680,455.31 Ether (ETH), according to the Ultra Sound Money website. In return, it burned 980,377.87 Ether, causing a net reduction in supply of 299,922.50 ETH. In other words, there was a cut in supply, or deflation, of approximately 0.25%.
The value may be low, but The Merge has also limited the growth of total supply. It is estimated that without the upgrade, the total supply of ETH would have increased by more than 3.8 million or 3%. The data considers the growth of Ether in circulation with the EIP-1559 cut and the maintenance of Ethereum as PoW.
In PoS mining, investors “lock” a minimum number of ETH to validate transactions in exchange for rewards paid by the network. On the other hand, the PoW setup made miners solve computational problems to record transactions in exchange for ETH.
The transition to PoS removed a significant number of miners from the market. But above all, the mechanism burns a portion of the transaction fees paid by users. Validators receive the priority fee or maximum value that users add to the base to motivate validators to prioritize transactions. Meanwhile, the base fee is burned, taking ETH out of circulation.
However, the current price of ETH is $1,630, practically the same as it was at the time of The Merge. Meanwhile, Bitcoin (BTC) has appreciated by almost 30% in the last 12 months. In short, The Merge has not yet managed to translate the improvements seen on the network into price.
New Ethereum update
In August 2022, a month before The Merge was implemented, the Ethereum Foundation alerted users about the new network upgrade. Entitled Paris, what is known so far is that the new update will not reduce gas fees, the amount paid by users when sending ETH.
However, Markus Thielen, head of research and strategy at Matrixport, said that reducing fees is the next big change that should occur. To achieve this, the Foundation must prepare a new EIP, 4844, which must tackle the high costs of the network.
“The reduction in rates [de transação] of gas now appears to be the critical missing building block that the next update called EIP-4844 is trying to address,” Thielen added.
Ethereum Improvement Proposal (EIP)-4844, or “proto-danksharding,” is expected to reduce gas fees and increase transaction throughput by introducing something called blobs. These blobs contain a large amount of data as blocks, but are not stored as blocks. This helps the blockchain to process data efficiently and cheaply.
The update is scheduled to go live in 2023.