Ethereum Upgrade EIP-1559: Can This Code Upgrade Send ETH to $10,000?

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The Ethereum developer teams has approved a proposition for a significant restructure in the distribution of transaction fees, with the goal of fairer access to the network.

Ethereum is on track for deep changes coming this summer. The London hard fork will implement a series of code changes, with one especially controversial proposition that will bring an unprecedented fee distribution structure to the network.

Ethereum Improvement Proposal (EIP) 1559 introduces a coin burn, meaning transaction fees will not go toward the miner’s balance, but instead be removed forever from the coin supply. 

The proposal arrives at a time when the Ethereum network is once again a hotbed of activity. After a relatively long bear market, the usage of ETH tokens and demand for transactions skyrocketed, powered by interest in decentralized finance and trading, as well as non-fungible tokens (NFTs). 

Gas Fees Caused Miner Feeding Frenzy

The Ethereum network attracted loyal miners, which still tried to grab the 2 ETH issuer every minute. But the new and highly appealing source of revenues was fees. Too many projects competed to have their transactions into the next block. Because of limited bandwidth, transaction fees rose significantly, and big players were ready to pay thousands of dollars to have their trades, DeFi positions, or other operations resolved immediately by miners.

The average ETH transaction fee remains about $15 as of March 2021, though for some transactions, it is much steeper. Even buying an NFT image may run up fees that cost more than the collectible itself. 

Why are gas fees so high? Just tried to buy my first #NFT for $60 and the gas fee was $115. #cryptocurrency #etherium #decentralized #Cryptoart

— Ramagetime (@ramagetime) March 3, 2021

The high network fees have happened for ETH on separate occasions, but now, for a long stretch of time, fees went to a peak above $20. During more idle times, the usual fee was often under $0.20. Daily fees on the Ethereum network expanded to above 6,000 ETH per day, and made up to 60% of revenues for miners. 

Coin Burn Causes Bullish Scarcity

Enter EIP-1559, which will have the direct effect of shaving off 35% of those revenues. The proposition, if passed and implemented, will remain forever as part of the Ethereum code, no matter whether the network relies on mining or moves forward with proof-of-stake. 

Once the proposal code is live, users will only pay a fixed network fee. They can choose to add a voluntary fee to the miner, partially preserving the competitive economics of making their transactions a priority.

But the biggest shift for ETH is that each transaction will burn some of the coin supply, and not pay it out to anyone. This will make the coin disinflationary, and put a brake on the current supply expansion. There is no set ceiling for how many ETH will be produced, and some users were worried there were too many ETH floating around. 

Miners Set to Oppose Network Upgrade

For miners, there are heavy decisions ahead. Crypto experts speculate they will be tempted to continue mining with the old rules, thus creating a competitive chain with an unknown fate. For now, miners benefit from a significant cut from all fees.

1/ ETH the cash machine

Ethereum's fees are worth ETH at $2850

The price of ETH is below the value of the cash it produces because ethereum's fees go entirely to miners, who are on track to be paid 8% of all ETH this year

EIP-1559 and proof of stake fix this. Here's how👇

— Ryan Berckmans (@RyanBerckmans) March 1, 2021

In the short term, the announcement of EIP-1559 has been bullish for ETH prices. The market reacted, pushing the asset to $1.692.93, with an expectation to revisit $2,000 or even enter price discovery in the coming months. In the most bullish scenario, ETH is seen as potentially rising to $10,000 levels as more projects join the network and boost its credibility.

The bullish case for the fee change is that miners will take a cut, but developers will have more freedom to implement their ideas. The new fee schedule will mean less direct competition and a possibility to deploy smart contracts and transactions with smaller barriers. 

The Ethereum network expects continued growth for decentralized finance, as well as NFT projects. Instead of a “world computer”, Ethereum has become a clearing house for highly active financial processes. 

The biggest hurdle to the upgrade is a coalition of miners ready to oppose the protocol. The more uncertain case for ETH is that the London upgrade in July will not be entirely positive, and some of the changes may not pass, leaving the network in its current condition. 

For ETH, it will be a tight pass, as currently the two predictions are running a close rase on the betting market.

Hey @sparkpool_eth, @flexpool_io, and @etherchain_org.

You can make over $200k profit by betting against #EIP1559 on Omen's new categorial market.

Put your money where your mouth is, whether for or against EIP1559. ⛏️

Predict here:https://t.co/KcFJhgUYjg pic.twitter.com/kz4YAMq2Yp

— Omen Prediction Markets (@Omen_eth) March 4, 2021

In any case, ETH will continue to be mined for at least a year after the upgrade. Miners will have the chance to open up a new marketplace, setting aside 50% of the block for users who also pay a tip in addition to the base ETH burn fee. Tips will go directly to the miner, and there is a possibility they can be paid in other coins and tokens.

Despite the proposal, using the Ethereum network will not become cheap. The base fee will still fluctuate depending on demand, but at least it will be predictable for a given time period. The tips may end up boosting revenues for miners, possibly even beyond current transaction prices.

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