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A look into the future of the Ethereum economy

5 min reading

Lets look into how much growth Ethereum has achieved throughout the years before and what does it have in store for future.

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While weeks and months often look like years in cryptocurrencies, it's only been 60 days since the hard fork with EIP 1559 was embedded in the Ethereum core network. The data world of EIP 1559 has emerged, but in the end the upgrade is still in its early stages. In fact, a few weeks ago I wrote about Nick Carter's very passionate proposal for Ethereum and it's probably too early to assess the impact of EIP 1559 on the network. However, this week I changed my tune a bit and looked at the potential impact of burning basic upgrade fees and their impact on Ethereum's longevity.

At a very high level, Ethereum uses block bonuses under Proof-of-Work (PoW) and Proof-of-Stake (PoS) to stimulate miners and chain validators. These incentives help secure the network adequately by paying those who are useful in confirming transactions and registering chain status, which in turn encourages competition to build a large and distributed base of miners/validators. Bitcoin uses a similar model, but every four years the amount paid in block prices decreases until the price becomes very insignificant and the supply of bitcoins reaches 21 million. As block rewards become insignificant, Bitcoin miners will be forced to rely on transaction fees to stay profitable. It makes sense that the network should maintain a high enough level of activity to pay miners for their services.

Ethereum and EIP 1559, on the other hand, now take a reverse approach to Bitcoin's security budget. EIP 1559 has taken most of the revenue from transaction fees miners previously received, but Ethereum will continue to broadcast rewards for blocks from miners (and possibly validators) indefinitely. While Ethereum uses an unrestricted supply approach, the newly introduced tax burden will help fight Ether inflation. Bitcoin's role as an inflation hedge is certainly a big part of the asset's success. His portrayal of “digital gold”, however, leads to less network activity, as the asset is at least initially a store of value rather than a medium of exchange. This issue has some wondering if transaction fees are enough to keep miners interested, whether miners will adapt, or whether the network needs to move to an updated compensation model.

It might be wrong to say that EIP 1559 "solved" this persistent payment problem for miners because here too, the constant supply of bitcoins is what makes investing in assets so attractive. On the other hand, the supply of ether will depend heavily on network activity and demand for block storage space. The Bitcoin network is still years away from realizing concerns and will likely surprise me with its adaptability and persistence. My comparison between the two networks is how they approach the incentive to dig, something I think EIP 1559 will likely address with its fee mechanism. A future where Ethereum can continue to subsidize validators without reducing Ethereum owners looks very promising for the network.

Below is an overview of the Ethereum 2.0 Beacon Chain network activity over the past week. For more information on the indicators presented in this section, see our 101 Eth 2.0 Indicator Discussion.

Approved claims

  • The Altair upgrade shifts the validation reward to a newly created "sync commission" of 512 randomly selected validators. HISTORY: The sync committee is responsible for supporting lightweight clients and signing the latest header blocks. The probability that a Validator will be elected to the current committee is 1/489 and the reward/penalty for confirmation increases over the 24-hour period that they are part of the synchronization committee.
  • CryptoPunk NFT appears to be selling for $530 million after transactions in the chain triggered a bid signal last Thursday. While CryptoPunks have sold up to 4,200 ETH in the past, fake sales will be the largest by an order of magnitude. The owner appears to have used a quick loan to make a fake punk purchase by borrowing and paying back 124,000 ETH. This move is likely a marketing ploy.
  • Cream Finance was exploited through quick loans worth more than $260 million in custodial assets. Cream is a well-known decentralized financing (DeFi) platform for loans with a history of exploitation. The express loan manipulated the cost of Cream's flawed collateral, artificially high prices, and enabled significant creditworthiness for operators. The exploiters demonstrate significant knowledge of DeFi, maximize loot returns, and hide their tracks with the Ren-Bitcoin bridge.

Aave was reportedly vulnerable to exploits similar to Cream, which prompted Justin Sun to remove more than $4 million in warranties. Vulnerabilities in xSushi collateral frightened Aave depositors and resulted in a ~20% decrease in Total Locked Value (TVL). The management process prevented immediate correction by the team and errors can still be used today. Analysis by the Aave team shows that manipulation is not profitable for hackers.

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The new DEFI platform enters the market! Earn passively - token sale 0.25 $

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