Markets Hail Ethereum’s Pick of “London” over “Serenity” by Boosting the Crypto by 25% over Past Week: What’s the Deal?

We have certainly noticed that the crypto related events tend to form cycles – more precisely, negative outflows are being constantly curbed by sudden positive inflows on the verge of the former’s gradual conversion into a sort of wide-scale proliferating panic. The positivity, however, tends to get self-reinforced, being backed by accompanying positive news. Why does this pattern occur?

As much as in every other capital market, fear coexists with greed. Big institutions and trading whales don’t want to be left behind – but, at the same time, they don’t want to become losers. So when the prices go down, former crypto advocates tend to be hiding behind, whereas crypto critics become more equipped to speak and be heard.

However, unlike all the cons – all the pros aren’t equal. The biggest problem of the critics is that they pretty much exhausted all their arguments a long time ago, and what they can do is to repeat, again and again, their familiar riffs about crypto riskiness, about crypto’s lack of collateral, about crypto’s being out of favor of legislators, about “you may lose everything”. The latter, remarkably, greatly reminds regulatory warnings about selling put options. That would imply there are no more traders selling the puts, but in reality there are plenty of them.)

As we see more institutions adopting crypto investments and crypto transactions with the latest news about JP Morgan Bank officially launching its crypto devoted AM arm, the central event of the past week was certainly that Ethereum’s much-anticipated “London” hard fork was finally activated. The Ethereum 2.0 upgrade, originally known as Serenity, was one of the most highly anticipated updates in the protocol’s history back then. It was designed to see Ethereum switch from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Also, Ethereum, by virtue of its self-balanced mechanism, could only handle 15 transactions per second (TPS) compared to VISA’s 1,500 TPS. The migration to PoS allowed the network to increase its throughput.

So far, the news of the successful upgrade has coincided with a runup in the price of Ethereum, the native token of DeFi and NFT enthusiasts. The cryptocurrency has robustly broken the epic $3,000 level, posting a 25% growth over the past week.

ETH/US Dollar chart
Source: TradingView

Reduced issuance and/or free float (availability) has been one of the strongest investing points of crypto tokens. Certainly, this is not a foolproof method of boosting their exchange prices forever, however, traders perceive them as a very tangible short- to medium-term incentive to buy a particular token – something like equity investors view companies’ share buybacks.

It has always been a tough go for Ethereum users. The blockchain has had long-standing challenges with scaling, and its highly unpredictable and sometimes exorbitant transaction fees used to annoy – at best, or even gradually turn off even its biggest fans.

Unlike in the case of Bitcoin, there has been no limit on Ethereum count as it was considered an “inflationary” cryptocurrency. Miners were rewarded with newly minted coins every time they validated a block. They were compensated with the transaction fees payable by users themselves.

That was okay, when prices of many tokens were rising like yeast, but when the bullish market trend stalled in the wake of China’s crypto mining crackdown, that suddenly became a big problem.

The problem has become even worse due to a surge in common interest in nonfungible tokens, which are, as we know, mostly built on Ethereum’s blockchain, as well as an explosive growth in the world of decentralized finance, or DeFi, which also largely uses the Ethereum blockchain. At some point, it became economically impossible to make ordinary settlement transactions with Ethereum. In the end, all incentives for using the Ethereum network all but vanished.

The main concept behind the London change of protocol was that miners must no longer receive income from transaction fees. This will reduce the supply and give Ethereum a much-needed boost. It would make transaction fees more predictable for those who use this blockchain for various widening purposes.

As we pointed out, while miners loved to see gas fees skyrocketing, this used to be a growing problem for Ethereum’s credibility as a prime NFT and DeFi sourcing coin in the long run. Before the upgrade, users would essentially participate in an open auction every block, where they would have to place a bid with a miner in something referred to as a “first-price auction.” The closed-bid setting meant that users were often taking a stab in the dark when proposing transaction fees (known as “gas prices”), picking a number that they felt would guarantee their inclusion in the next block of transactions.

The hard fork itself consists of five Ethereum Improvement Proposals. They are called EIPs for short, and each puts forth a set of changes to the code. The one that everyone is latching onto is EIP-1559. EIP-1559 will cut transaction fees by replacing the “first price auction” model with a “base fee” model. As a result of the burning of coins, Ethereum should finally become a deflationary coin. Four more protocol updates provide for a delay in increasing the level of mining difficulty, blocking smart contracts with addresses starting with ‘0xEF’, reducing compensation for paying commissions and changing the operation that returns the base commission of a block.

Creator of Ethereum Vitalik Buterin believes that the successful launch of the London update “is proof that the Ethereum ecosystem is capable of making significant changes.” General words, but still. He also said during one of his numerous video interviews that EIP-1559 is “definitely the most important part of London.”

The update involves burning part of the transaction fees depending on the network load and reducing the volatility of the “gas” price. In our view, anything and everything that increases predictability and numeric expectations of various components of the crypto market automatically improves the quality of this market. On top of that, there is more evidence of the feasibility of the upcoming merger with ETH 2.0.

Buterin also added: “The update definitely makes me more confident about the merger with ETH 2.0.” After the merger, the new network will be able to run smart contracts on PoS, eliminating energy-intensive mining operations and potentially reducing network power consumption by 99%.

Vitalik Buterin mentioned that the update also resulted in greater variability of block sizes, which means users are less likely to have to wait that long to process transactions in fixed blocks under heavy load. Blocks can now dynamically expand or contract according to the number of incoming transactions. We agree with most of these statements.

Vladimir Rojankovski, MBA/LIFA

VRM Research

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