NEW YORK (Reuters) - Ethereum is the second-largest cryptocurrency network. A technical adjustment will dramatically alter how transactions are processed. It will also reduce the supply and sharply increase its price.
The scheduled coding overhaul will be live on Aug. 4.
Analysts said that the Ethereum Improvement Proposal 1559 upgrade is similar to a bitcoin "halving", in which bitcoin supply was reduced by periodic adjustments. Each halving contributed to bitcoin's rise to new heights.
According to Grayscale, Ethereum is now the most popular digital currency, with more than $12 billion in daily transactions.
Andrew Keys, managing Partner at DARMA Capital, stated that ether's current pricing has not yet taken into account the looming software update.
He predicts that next week's software update, along with an upgrade in the first quarter of 2022, will "easily quintuple ether's price by next year." Thursday's ether price was at $2,312 up 0.6%
What is EIP 1559?
EIP-1559, a software update that fundamentally alters the way transactions on Ethereum are processed, provides clear pricing on transaction fees in Ethereum paid to miners to validate transactions and "burning a small amount" of those tokens. The tokens that have been burned will be taken out of circulation permanently.
Token burning is when miners send tokens to addresses with unobtainable private keys. The tokens are not available to the public without a private key. The currency that remains in circulation is rarer and more valuable when there are fewer tokens.
WHAT IS THE CURRENT PRACTICE ABOUT THE ETHEREUM BLOCKCHAIN
A person or entity wishing to send a transaction to the Ethereum network currently must pay a "gas fee" in Ethereum to enable miners to process their transactions.
However, the exact amount of the transaction fee is unclear and market participants claim that it is impossible to know the price in advance.
This creates two problems, according to Matt Hougan chief investment officer at Bitwise Asset Management.
He said, "First, it creates uncertainty around whether your transaction will be processed in a timely manner." "Third, people overpay due to not knowing the clearing price. They bid too high to ensure the transaction is processed."
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Will MINING, BUYING, AND SELLING ETHER EASIER BECOME EASIER?
EIP-1559 modifies this mechanism by establishing a "base charge" for miners for every transaction. Part of it will be burned. To speed up the process, participants can include an optional tip with their base fee.
Market players also suggested that the space in each block should be doubled. Blockchains such as Ethereum can settle transactions in blocks or batches. Each block can only contain a limited number of transactions.
Blocks are generated on Ethereum every 17 seconds. EIP 1599 will be deployed on Block 12,965,000. This is expected to occur on Aug. 4, according to DARMA'S keys.
A bug bounty was an incentive that paid people for finding bugs. This process is now complete.
WHAT DOES IT MEAN TO ETHER SUPPLY?
Bitwise's Hougan stated that EIP-1599 will decrease ether's overall inflation rate from 4% to 3% per year. He said that this is only half the amount of reduction seen in bitcoin "halving events".
WHAT DOES IT MEAN TO INVESTORS?
This change should make it easier to understand the benefits of holding ether. Hougan stated that EIP 1559 would increase transactions on Ethereum and increase the use of Ethereum, which could help to bring institutional investors into the market.