On the First Anniversary of Ethereum’s London Upgrade, the Annual Inflation Rate Fell by More Than 53%

TL: DR
- Ethereum is an inflationary cryptocurrency with no limit to its number such that each time a block is mined, miners receive a brand-new coin.
- London upgrade is a collection of improvement proposals meant to reduce supply and solve the problem of transaction fees.
- The deflation caused by the EIP-1559 included in the London upgrade is responsible for the current fall in the inflation rate one year after the upgrade.
- The London upgrade is essential to adopting Ethereum 2.0 and making Ether a deflationary cryptocurrency.

Keywords: London upgrade, hard fork, issuance, inflation, deflation, EIP-1559


Introduction

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On August 5, 2021, Ethereum underwent a round of crucial hard fork, popularly known as the London upgrade. Before then, there was also an essential upgrade with the code name Berlin hard fork. The Berlin upgrade optimized contracts ensured gas efficiency, updated the Ethereum Virtual machine, and protected against direct denial of service attacks (DDOS). The London upgrade, which occurred at a block height of 12,965,000, was a change to the transaction fee on the network to help with scalability and resolve high transaction fees. One of the improvement proposals contained in the London upgrade is EIP-1559. Part of the purpose of EIP-1559 is to change the speed and incentivization of Ethereum mining. One year after the official implementation of EIP-1559, the destruction of BaseFee brought by the upgrade saw the annual inflation rate falling by more than 53 per cent.


What is London Upgrade?

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The London Hard Fork is a collection of five Ethereum improvement proposals (EIPs). These EIPs are:
- EIP-1559 (Reform of Fee Market)
- EIP-3198 (BaseFee opcode)
- EIP-3529 (Reduce Gas Refund, invalidate Gas Token, serve EIP-1559)
- EIP-3541 (reject new contracts starting with 0xEF)
- EIP-3554 (Difficulty bomb postponed to the first week of December 2021)

EIP-1559 is among these improvement proposals that have piqued the market's interest the most. This proposal advances a mechanism for optimizing Ethereum transactions to make transaction fees on the Ethereum network more predictable and resolve the previous "pay-as-you-go" fees. The goal of EIP-1559 is to create a more efficient charging market and to simplify the gas fee payment process for client and application software, removing the possibility of users paying excessive gas fees.

Because Ethereum is an inflationary cryptocurrency, there is no limit to its number. When a block is validated, miners are rewarded with brand new coins. They are compensated through transaction fees paid by users. The London upgrade was meant to change the mechanism, so miners no longer earned money from transaction fees once the update was implemented. This improvement would reduce supply and provide Ethereum with much-needed support. It would make transaction fees for those who use this blockchain more predictable.

The upgrade also ensured that no amount of network congestion caused the Ethereum gas price to skyrocket. This step toward price transparency is instrumental in increasing the adoption of decentralized applications. The upgrade was a giant leap towards Ethereum 2.0 and a step towards making Ether a deflationary asset.


The Hope and Expectations Before the Upgrade

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The deflation caused by the EIP-1559 included in the London upgrade, that is, the amount of destroyed Ethereum exceeds the amount of Ethereum that enters circulation, is the main reason why the London upgrade got so much attention before its launch. The market sees this deflation as a new boom and a crucial positive promotion of the market rise. The new supply will not only cause changes in the supply and demand for Ethereum, resulting in an upward trend in the price of ETH, but it is also very likely to drive the overall cryptocurrency market to new highs.
According to the lowest estimates, 700 ETH would be destroyed daily, and 250,000 ETH would be consumed yearly. If 6000 ETH are destroyed daily, 2 million ETH are destroyed yearly. The ongoing reduction in supply will provide the most support for price increases.


Some Drawbacks

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The increase in gas fees sparked community discussions shortly after the London upgrade, which claims to be able to solve the problem of excess gas. Some observers have advanced reasons for this, which partly include:
• The fact that service providers, including exchanges, disabled some functions (such as deposit and withdrawal) during the upgrade resulted in a concentrated outbreak of demand after the upgrade was completed;
• Some large-scale NFT airdrops are underway;
• The setting in the Gas Limit lower than 30 million by some miners, resulting in the actual gas usage rate of each block being less than 50% and aggravating chain congestion;


One Year After the Upgrade and the Fall in the Inflation Rate.

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Some interesting statistics have emerged one year after the London upgrade, which may best explain the fall in Ethereum's annual inflation rate;

According to data, on August 5, 2022, the total amount of Ethereum destroyed amounted to 2,571,183.34, worth about $4.14 billion at current prices.

Within the first day of the London hard fork upgrade, the amount of Ethereum destroyed was around 4,700; and the amount of destruction exceeded 30,000 within a week of the upgrade. In a year, the additional issuance of Ethereum was 4,623,662, and the destruction amounted to 55.61% of the total additional issuance. The annualized rate of inflation for the ETH money supply fell to 0.51% at the end of the first quarter of 2022 from 1.10%.


The Implication of Decreasing Inflation Rate

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Inflation rates are typical in cryptocurrencies such as Bitcoin, Ethereum, and others. Except for a few cryptocurrencies, Bitcoin's supply growth is the slowest, and it has thus remained a standard for other cryptocurrencies.

Some have said that digital assets that do not match Bitcoin's inflation rate, which is currently around a notional 1.8%, are inferior and lack the capabilities to become a viable form of digital money.

This was the case for Ethereum, which many ardent Bitcoin supporters criticize for its lack of a mathematically-enforced supply cap and its fluctuating issuance rate, which is currently based on block times and unclear rates. The London upgrade and the fall in the inflation rate are meant to change this narrative.

Experts have observed that the falling issuance rate of Ethereum could bestow a monetary premium on the second-largest cryptocurrency by market capitalization, potentially allowing the asset to transmit value over time without users having to worry about the potential loss of purchasing power. These deflationary pressures on Ethereum are expected to make the second-largest cryptocurrency become a store of value.


Conclusion

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The London upgrade, which is an essential step towards Ethereum 2.0, is yielding some of the expected results in reducing the issuance of the second-largest crypto. The fall in the annual inflation rate is a pointer to this fact. The scarcity generated by the amount of destroyed Ethereum exceeding the amount of Ethereum that enters circulation will expectedly transform Ether into a premium currency.







Author: Gate.io Observer: M. Olatunji
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