The Merge: Ethereum Deflationary Mode Intensifies as the Launch Draws Nearer

Over the years, the Ethereum community has been working around the clock to successfully incorporate the proof-of-stake (PoS) mechanism on the mainnet. This is an effort to replace the proof-of-work (PoW) algorithm, which has been the foundation of this blockchain network since its inception.

This realization of the incorporation is drawing nearer, and it will be the backbone of the soon-to-be-launched Ethereum 2.0. As a result of recent updates with this development, deflation is happening with Ethereum (ETH) issuance.

This recent developmental process has led to deflation in the issuance of ETH. This increased the transaction fees burnt more than the amount of ETH issued via mining. However, some industry participants expressed their disbelief in the happening before when the network upgrades are happening.

Users believe that this will be the driving force behind the price of Ethereum in the coming months and years. This influence cannot be ignored on the price and value of Ethereum. Meanwhile, participants believe that this deflationary effect will become more operational on the mainnet when the central chain transitions totally to Ethereum 2.0.

There is a hypothesis that this deflation will reduce at 10X for each block that gets mined to issue 2 ETH. But how much of these deflationary effects will play out with Ethereum transition, and should we expect a new type of Ethereum to be issued.

New Developments

Towards the end of last year, Ethereum launched the Beacon Chain that operates with the proof-of-stake algorithm. With this algorithm, users can participate in Ethereum staking. As a result, they become parts of the validators on the chain. This would become a replacement for current miners using physical hardware for validations. Thus, they are adding new blocks as they maintain the network.

Precisely on the 17th of November this year, Ethereum allowed more than 260,000 participants to become validators as they stake 32 ETH as a minimum requirement to be a validator. As a result of this and some other factors—such as the effects of exploding adoption of decentralized finance (DeFi) operating mainly on the Ethereum network, Ethereum’s price hits different new highs.

The London Hard fork is the Ethereum upgrade that most network users expected to see, and this came with some regarded inconveniences for the network users. One of the inconveniences is the change in how miners and users get paid for leveraging the network. And this happened due to a feature known as the Ethereum Improvement Proposals (EIPs).

This feature results in the destruction of some portions of ETH utilized as transaction fees. This resulted in some grumbles amongst the miners since transaction fees are the only incentives they leverage as compensation for using the platform.

One significant advantage of the London hard fork is the deflationary burning mechanism that accompanies the upgrade. This leads to a portion of Ethereum getting burnt. And results in the total removal of some units of Ethereum from the main chain. With this, there is a general belief that this should reduce the supply of Ethereum. As a result, there will be scarcity and an increase in Ethereum’s value on being an asset.

Despite these upgrades, the Ethereum blockchain still lacks in rectifying the high transaction fees associated with completing transactions on the main network. Due to this, users are now looking into leveraging DeFi networks which are multichain, to reduce the costs of using the Ethereum network.

The latest update that follows the London hard fork update is regarded as Altair. Altair is used as a testing tool to ensure a successful merge of the current Ethereum network and ETH2 upon its launch. Likewise, it serves as a tool to ensure that validators receive their participatory reward.

However, there is a proposed penalty for invalid blocks or false raising of the block levels at the initial launch. The initial launch was lenient with Beacon Chain to accommodate more stakers. But this penalty became fully incorporated since the network is efficiently reliable.

The Merge Becoming Center of Attention

Before ETH2 can fully launch, some minor upgrades are required to ensure a successful implementation and merging process. One of the features that will launch is the EIP-4345, which changes the parameters of an update known as Ethereum’s Ice Age Difficulty Bomb. This feature represents the difficulty levels for miners participating in the current Ethereum mainnet.

Upon the launch of the Bomb, the mining difficulty on the main network will increase, and the threshold will be the driving force behind the price determination and incentive distribution on the mainnet.

Due to various developments and the growing demand for the Ethereum network to scale and upgrade, the Merge is now the main focus of the Ethereum development community. And, “The Merge” represents the final phase for developing essential upgrades as a final step towards Ethereum blockchain evolving as PoS consensus.

Reality Expectations of Ethereum 2.0

Although the date for the ‘The Merge’ to go live is not known, a report revealed that Ethereum developers wouldn’t stop working towards the successful incorporation of the Merge to the mainnet. As such, ETH2 will launch. However, crypto users and enthusiasts won’t stop asking questions of reality upon the launch.

The majority is concerned about the aftermath of launching Ethereum 2.0 after the complete upgrade. While some significant changes will occur on the main network, there is no indication that the gas fees will reduce or a significant drop will happen. The only reliable scalability option is the layer-two solutions that will be deployed with the PoS consensus algorithm.

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