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Ethereum developers team has been pursuing a more scalable, low fee, less-energy intensive, and deflationary smart contract platform for quite a while. And the latest ‘London hard fork’ was a major step in that direction — arriving on schedule at 12:33 pm UTC on Aug. 05 at block height 12,965,000, ushering in the Ethereum Improvement Proposal (EIP) 1559. With this upgrade, Ethereum will now undergo a significant overhaul of the network’s transaction fee market — reducing the transaction fees on the network and decreasing ETH supply among other things.
The move to more desirable Proof of Stake ETH 2.0 started last November, with the deployment of “The Beacon Chain.” Most of the crypto exchanges halted deposits & withdrawals of ETH as the recent transition took place. The upgrade to the Ethereum network has provided a welcome relief not just to the Ether coin but the broader crypto market as well. Dropping below $1800 on July 20, ETH has been climbing steadily in anticipation of this upgrade — trading above $2900, at the time of writing.
Coincidentally, regulatory pressure by the U.S has helped, if anything, in the recent crypto market rebound as more investors believe it would bring the digital assets market towards mainstream adoption. Coming back to EIP 1559, it will involve ‘burning’ some of the base fees, thereby reducing the supply of the digital coin. The higher the transactions, the bigger would be the demand for Ethereum — accompanied by greater fees as well. In simpler terms, higher demand for ETH would result in a tighter supply.
Simple economics explains the rest — a higher demand and a lower supply result in an increase in price. So far Ethereum gains were in anticipation of this transition, but going forward the above-mentioned mechanism would be in play. Having said that, the demand-supply relationship in cryptos is not that simple and we will have to wait and see how much supply actually gets burned, and whether more of the existing Ethereum supply becomes active to make up for the burned supply.
Ethereum is one of the most active among cryptocurrencies when it comes to supply — primarily because it is actively used as the main asset in decentralized finance (DeFi). In fact, DeFi has been the single biggest contributing factor accounting for the Ether transaction volume growth. Returning to our previous argument about ETH supply, you can see in the top chart (Figure 1, above), 74.05M illiquid ETH are still being held despite seeing a drop of 65.72k ETH within the last week.
According to Chainalysis Market Intel, 45% of the supply, is held in self-hosted wallets that hold more than 10k Ether and, based on historical behavior, have an 8% probability of sending Ether in a given week. The more important question right now is how the behavior of investors holding ETH will change with this upgrade. As you can see in the bottom chart, medium-term investors or the ones who have held the asset between 2–52 weeks is the highest (67.97M ETH), followed by ‘hodlers’ (or long-term investors) sitting on 46.07ETH.
Right now, it seems the knee-jerk reaction for most investors would be to hold on to their ETH holding in anticipation of some smart gains, but fewer transfers would mean the supply would not decrease that much either. Throw in the ETH supply needed to feed the DeFi market and the picture gets even more complicated. Luckily, however, transparency of on-chain data would enable us to accurately measure the effects of this change in the not-so-distant future. For now, the investors who doubled down on their existing ETH positions around the recent lows can bask in the glory of the gains.
Originally Published on Medium
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