EIP-1559 Effect: What Will Happen After the Launch?
A quick overview of the short and long-term effects of EIP-1559 - Just hype or a game-changer?
Hey DEFI TIMES community,
EIP-1559 launches on August 4, which is a historic milestone for the Ethereum community. It was co-authored by Vitalik Buterin and Eric Conner a long time ago.
The idea existed for years. We knew it was possible, worked on it patiently, and now… it will go live in three weeks!
EIP-1559 is the proof that Ethereum developers ship. Everything that is yet to come (merger, sharding, optimistic rollups, …) will eventually become reality as well!
It’s one of the greatest milestones in the history of Ethereum. We started small, and now turn ETH into one of the best stores of value the world has ever seen!
EIP-1559 is a turning point in terms of how the crypto community perceives ETH as an asset. We go from inflationary to deflationary... weak to hard money!
This newsletter is all about the effect of EIP-1559. What happens after August 4?
Today, I will give you a quick overview of the possible short and long-term effects of EIP-1559!
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EIP-1559 Effect: What Will Happen After the Launch?
EIP-1559 Simply Explained
Okay, EIP-1559 turns ETH into hard money. But what does that mean? Simply put, EIP-1559 burns the majority of transaction fees! Every time someone sends a transaction, the transaction fees are eliminated from the circulating supply. The fees don’t go to the miners (as is the case today) - they vanish!
This, of course, causes deflationary pressure because EIP-1559 constantly removes ETH from the circulating supply - it makes ETH more scarce and ultimately… more valuable!
With EIP-1559, we can keep inflating the ETH supply to secure the network without sacrificing scarcity.
Bitcoin solves the scarcity problem with the fact that there will only be 21 million coins in existence! But is this sustainable? Will transaction fees be enough to secure the network when the last bitcoin is mined? We are yet to see!
Ethereum doesn’t face this problem. While Bitcoin relies on transaction fees to pay the miners, Ethereum burns them!
And the best thing: If the burned transaction fees are greater than the issued supply, ETH becomes deflationary. Every time someone pays a transaction fee, ETH gets a little bit more scarce!
EIP-1559 has the potential to change ETH’s role as an asset. But what will happen after it launches?
What happens in the short and long-run?
Short Term effects of EIP-1559
Now that we know what EIP-1559 essentially does, let’s dig a little deeper to understand the short-term effects of the hard fork.
In its simplest form, EIP-1559 is some kind of supply reduction, which is very similar to the halving event of the Bitcoin network. Every four years, the Bitcoin block rewards are cut in half. For example, if the current block reward is 12.5 btc per block, then the new block reward will be 6.25 after the halving.
EIP-1559 also reduces the issuances; however, not by cutting the block reward but by burning transaction fees. In his popular tweets about EIP-1559, Squish compares EIP-1559 with the halving event:
Squish claims that EIP-1559 will essentially have the effect of three Bitcoin halvings in terms of supply reduction (after the merge).
However, in addition to ETH’s soundness, Ethereum has also a growing DeFi, L2, and NFT ecosystem to show, which accelerates the use case of ETH even more.
So now, the question is: What will happen right after EIP-1559 launches? If EIP-1559 has the effect of a triple halving, the best way to figure this out is to look at what happened when the Bitcoin halving occurred.
As you can see, the Bitcoin halving had a pretty big effect in terms of price… right before it took place.
However, just after the halving went through, prices consolidated and the hype vanished. Weeks before the halving, people were speculating about the possible effects and a new supercycle. Buy the rumor, sell the news.
But after the halving, the hype was gone. We were left with a supply reduction that was yet to show its effects. For weeks and months afterward, nothing happened!
I expect a very similar situation when EIP-1559 goes live. It probably will cause hype, but the true effects will only come to light months afterward. In my opinion, not much will happen in the short run. If we don’t see any speculation and hype, the EIP-1559 launch could even be a non-event!
That will obviously change when EIP-1559 shows its true face!
It’s a sleeping beast!
Long Term effects of EIP-1559
So, in the short term, EIP-1559 won’t do much! But what will happen in the medium and long term?
Again, to answer that question, let’s take a look at the long-term effects of the Bitcoin halving.
For the first six months after the halving, nothing really happened. Until mid-October, Bitcoin went through a sideways market. The effects were not immediate. Maybe that should be the biggest takeaway from this newsletter!
Any event that causes some kind of supply reduction will not have immediate effects!
The Bitcoin halving showed its true power after six months. But then, the price exploded as people were expecting!
I expect a very similar thing with EIP-1559: Nothing happens in the immediate future. But long term… there could be no stopping the bull!
As EIP-1559 could have three times the effect of the Bitcoin halving, it could even have a much more significant impact. That, of course, depends on how much fees are being spent. The more fees, the bigger the impact.
EIP-1559 won’t do much in the short run. Sure, Ethereum’s UX will improve - no stuck transactions anymore! That’s great, but it won’t matter in terms of price appreciation.
The supply reduction will take time to show its true potential. How long will it take?
Maybe six months, just as the Bitcoin halving - may be more or less time? Let’s see!
But one thing is clear: Don’t expect EIP-1559 to stop this bear trend just yet.
EIP-1559 is probably the most important Ethereum Improvement Proposal we have ever seen. And it will change Ethereum forever. But good things take time!
So sit back, enjoy the ride!
You know what’s coming!
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
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