Ethereum‘s hard fork update EIP-1559 fuels a massive crypto comeback

The upgrade's primary objective is to increase the predictability of Ethereum transaction costs.

Crypto asset values have soared in recent weeks, led by a near-doubling of ether prices in response to a critical upgrade to the Ethereum network.

Prices of ether, the Ethereum blockchain's native cryptocurrency, increased by more than 85 percent from a low of roughly $1,700 on July 20 to a high of $3,200 on 10 August. Bitcoin increased by 60% during the same period, from less than $29,000 to more than $46,000.

Following the rally, bitcoin and ether are trading almost midway between their recent lows and their April and May all-time highs, respectively.

While it is too early to declare the crypto downturn finished, the price recovery is a positive sign for bulls. Prior to this run, most of the market discussion focused on whether crypto asset prices would fall more than they already had as part of a lengthy, grinding bear market akin to the 2018 "crypto winter."

For the time being, that type of discussion has been replaced by optimistic euphoria about EIP-1559, an improvement to the Ethereum protocol that took effect last week. The upgrade's primary objective is to increase the predictability of Ethereum transaction costs by replacing the first-price auction process with a set fee (dubbed a base fee) and optional tip.

Previously, all transaction fees were paid to Ethereum miners; however, under the new scheme, the basic fee is "burned" (removed from circulation) and only the tip is distributed to miners. According to analysts, a user who pays the base fee and a little tip has a high probability of their transaction being included to the blockchain.

In essence, the protocol now calculates the market clearing transaction cost, rather than requiring each user to do so independently.

While EIP-1559 was primarily motivated by user experience, the upgrade's impact extends beyond fees. Base fees are burnt to discourage miners from entering into off-chain agreements that might jeopardise the goal of more predictable transaction prices. However, the design has the unintended consequence of slowing the growth of the ether supply, which many investors consider as a positive development for the coin.

According to the website super sound money, approximately 20,000 ETH has already been burned since the update last week, which is equivalent to $62 million at current ether rates.

Renaissance of NFT

Along with EIP-1559, a rise of interest in nonfungible tokens (NFTs) — the majority of which are based on the Ethereum blockchain – fueled ether's upside.

As ETF.com reported earlier this week, the value of one of the earliest NFT ventures, CryptoPunks, has soared recently, with even the cheapest punks fetching six figures.

In recent days, OpenSea, a marketplace for NFTs, saw volume on its platform approach all-time highs. Now, as a result of the new Ethereum rules, a significant portion of the transaction fees connected with that volume is being burned.

Moving in lockstep

Even while Ethereum has recently dominated cryptocurrency news, bitcoin remains the world's most valuable cryptocurrency, with a market worth of $870 billion to ether's $370 billion. For the time being, the discussion over the bitcoin network's energy use, which was sparked by an Elon Musk tweet, has gone down.

Rather than that, the attention has shifted back to whether ongoing retail and institutional acceptance of "digital gold" can reintroduce prices to their all-time highs near $65,000 and beyond.

Because the crypto sector tends to move in lockstep, bitcoin's short-term fate may be determined more by Ethereum's progress than anything else.

Support us!