On September 15 of last year, a pivotal upgrade known as the Merge brought about significant changes to Ethereum, the largest smart contract blockchain. The upgrade transitioned Ethereum from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) one. This modification resulted in 680,455.31 ether (ETH) being minted and 980,377.87 ether being burned, causing a net supply decrease of 299,922.50 ether based on data from the Ethereum analytics dashboard ultrasound.money.
In simple terms, if Ethereum still adhered to the proof-of-work arrangement, the net supply could have increased by a whopping 3.8 million or 3%. The new PoS mechanism needs market players to hold a certain amount of ether to validate transactions, which provides them rewards in return. This is a deviation from the previous proof-of-work setup, where miners solved computational problems to earn rewards.
Importantly, the PoS mechanism eliminated a considerable amount of miner supply in the market. Transaction fees paid by users are now partially burned, taking more ether out of circulation. Ethereum’s sudden transition to a deflationary currency has reduced its impact on the environment considerably, as anticipated. Yet, despite this eco-friendly gain, ether’s market valuations have stagnated since the update with its price hovering around $1,630. Bitcoin, on the other hand, has surged nearly 30% in the past year.
Further complications arose in August 2022, when the Ethereum Foundation cautioned users that the upcoming Paris upgrade wouldn’t lower gas fees. As a result, prices dropped, and Ethereum was unlikely to keep pace with Bitcoin. This downturn, however, hinted at a spark of hope for Ether investors; the prospect of lower gas fees. Markus Thielen, head of research and strategy at Matrixport, stated that the upcoming EIP-4844 promises a solution.
Ethereum Improvement Proposal (EIP)-4844, also christened as “proto-danksharding,” is anticipated to reduce gas fees and enhance transaction throughput by presenting blobs for data. Unlike blocks, blobs, which contain bulky data, aren’t stored perpetually on the Ethereum virtual machine, making data processing cheaper and efficient.
The upgrade is set to roll out later this year, presenting a crucial opportunity for Ethereum to bounce back from its present slump. However, the stakes are high, and the success of the EIP-4844 upgrade is undeniably critical to Ethereum’s future. If this upgrade only achieves minimal improvements, Ethereum’s heydays might be history. Nonetheless, investors should keep an eye on EIP-4844 and any positive news surrounding the upgrade; it just might be the key to Ethereum’s resurgence.
Source: Coindesk
