#3 - How I discovered cryptocurrencies? (and what is EIP 1559?)

Introduction

Before I launch this article to the moon, I just want to give a heads up for deviating from the original plan of writing about my university experience as mentioned in my previous article. I have to admit that I was too caught up with a piece of exciting news in the cryptocurrency space, that had long been in the pipeline. And as a “Blockchain & Cryptocurrency Enthusiast”, I decided that it was time that I take pride in the LinkedIn title I gave myself and start sharing my coverage on this incredibly dynamic and revolutionary arena.?

As a typical millennial, I first stumbled upon blockchain and cryptocurrency around the year 2018, when I was doing some research for a university assignment on the use of blockchain in the future of accountancy and audit. The moment I read about the origins and applications of blockchain, I was immediately hooked and found myself down the rabbit hole, reading about real-world uses cases to get a better sense of what it could do. And of course, I found out that blockchain was the underlying technology that enables the functionality and existence of the multiple layers of digital assets we hear of today, for example, Bitcoin, Ethereum, ADA, 'dogecoin' and a whole bunch of other tokens or alt-coins, as they call it.

I continued to pursue that interest for years to come but never really did much, other than reading and keeping up with developments in the crypto space (If you’re wondering where I get my daily dose of news, it’s usually Coindesk, major news platforms or influential Twitter accounts like Barry Silbert). Feeling sick of only gathering theoretical knowledge, I battled sleepless nights, doing research on crypto until I was convinced enough to set aside some capital to invest in the market. And at the beginning of 2020, I finally did it - set up an account on Luno to make my first purchase of BTC and ETH.

I still remembered all the self-assurance and late-night thoughts, trying to convince myself that cryptocurrencies were a good investment not because they were ‘fancy’ digital assets, but because the underlying blockchain technology was sound and had growing practical applications. And as the hype for cryptocurrency grew to unforeseen levels back in the late 2020s, mainly driven by the major institution interests in the asset as 'digital gold', I had all my doubts put to rest. (You can check out what happened to Bitcoin's prices in 2020, here)

With more and more news around crypto being circulated among friends, group chats, and social media each day, I thought that it'll be a great time to share my interest in a recent development on the Ethereum network.

For context, Ethereum is a decentralised, open-sourced layer-1 blockchain that was launched in 2015. It runs on the programming language, Solidity and has its own cryptocurrency or tokens known as Ether (signified by the acronym, ETH). Ether is considered the digital fuel that enables operations on the network to be executed, in Ethereum's case, by the Ethereum Virtual Machine (EVM).?

(If you want to learn how blockchains work, check out this really basic but helpful video).

Now for the exciting bit. On the 5th of August 2021, at Block 12,965,000, the latest Ethereum Improvement Proposal, EIP 1559, along with other EIPs 3554, 3529 went LIVE. Also known as the “London” hard fork, the code changes were activated to fundamentally make transactions on the network less volatile and more predictable to users. Miners, who are mainly responsible for recording transactions and blocks on the network upgrades were directly affected. It has become much harder for them to earn from mining. Why, you may ask?

Find out more from some of the key points I've picked up from the recent developments:

Stable gas fees?

As EIP-1559 replaces the first-price auction system with a fixed-price scale, Ethereum users won’t have to guess how much gas fees are required, for their transactions to be recorded. Rather than letting users decide what their gas prices will be, the change introduces an explicit ‘base fee’, that is calculated automatically based on the amount of network congestion and how much space is being utilised per block. This makes the protocol less costly and volatile by improving fee market efficiency (fees can only increase and decrease by 1.125x in each block), ultimately creating a more stable, transaction-friendly network.

Miners are getting burnt

Once users pay the ‘base fee’, which is set to only be accepted in the native ETH currency, the x amount of ETH will be sent to a 'burner address' on the Ethereum chain. No user has the private keys or is able to send funds to this address, and miners won’t even accept any transactions that come from it. The ETH is basically burnt and eliminated permanently from the total circulating supply, similar to physically burning a Ringgit Malaysia bill. The reason for not distributing the fees is to remove the financial incentives for miners to artificially congest the network and inflate/maintain the base fees at higher levels. Although in the EIP 1559, there is an optional ‘inclusion fee’ that users can voluntarily give to miners as tips to prioritise certain transactions.?

ETH is becoming ultra-sound money?

The supply of Ether is limitless, unlike the 21 million cap on Bitcoin. With the EIP 1559, the burning mechanism introduces a systematic way to offset the coin supply increases on Ethereum without setting a supply cap. As of 8th of August 2021, at 4.50 pm, around 12,865.57 ETH has been burnt since the upgrade went live, with the recent NFT project, COVIDPunks taking the top spot in the burn leaderboard (Ultrasound.money, 2021). This means, at the corresponding price, around US$ 40.3 million worth of ETH has been burnt as a result of the new gas fee protocol.

With supply becoming more limited, Ethereum is likely to experience deflationary pressure. Relatively stable demand situations (measured by the number of daily transactions on Etherscan), may further support ETH in the long run, building a stable network that potentially attracts more institutional capital. Lots of talks are going around, saying that this might drive markets upwards, maybe even exceeding past all-time-highs (ATH) and reaching new ones, somewhat resembling the halving seen in Bitcoin over the years.?Others say the upgrade will cause too much market value to be disposed of and force users to flock to other chains. I guess we'll just have to be patient and watch the network unfold.

As with all technology upgrades, there are risks and, if you’re interested to know more about the downsides and the overall EIP 1559 implications, do check out this white paper by Coindesk Research.

Disclaimer, this is by no means financial advice or a sponsored post for any of the above references. I'm merely sharing my interest in the crypto space and shedding some light on where my bet is going to be.

Hope you enjoyed the article and maybe picked up a thing or two about cryptocurrencies.?

If you have any questions or want to discuss crypto, feel free to drop me a message. I’m always open to share my thoughts and hear different perspectives about such a young and wild market.?

Also, do leave a comment on what you think about the article or any feedback on areas of improvement (it helps a lot!).

That’s it for this one guys, ciao.

#williamwillwrite