The ethereum upgrade that will destroy coins is happening today. Here are 4 things you need to know.
Dado Ruvic/Reuters
- A major ethereum network upgrade, codenamed EIP-1559, is due on Thursday.
- The change has excited some investors, as it will start to destroy or "burn" ether coins.
- Insider breaks down four things you need to know about the upgrade.
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A hotly anticipated upgrade is coming to the ethereum network on Thursday that will change the way transaction fees work and start to destroy coins. It had been scheduled for August 4 but was delayed slightly.
The change is technically known as Ethereum Improvement Protocol 1559, or EIP-1559, and will be included in a network upgrade called the "London hard fork."
Here are four key things you need to know.
EIP-1559 aims to make transaction fees more predictable
The change to ethereum is all about making transaction fees more predictable, therefore making the network easier to use.
Fees are highly volatile, in large part because the network uses an auction system. Users bid against each other to have their transactions processed and verified by other users, called miners.
Transaction fees can soar when the network is busy. But the main problem, as developers see it, is that the blind auction system makes fees highly volatile and unpredictable.
After EIP-1559, users will pay a "base fee," which will be algorithmically determined by the network depending on how busy it is, instead of submitting bids. They will also be able to pay a miner a "tip" to have their transaction processed sooner.
The idea is that the network's base fee will always be clear to users as they go into transactions and won't jump around from one minute to the next. If it's too high, users can wait until it's lower.
It will destroy coins - and may boost ether
EIP-1559 has excited people because it will destroy or "burn" ether - the cryptocurrency of the network.
Miners do not receive the base fee; otherwise, they could artificially congest the network to keep the fee high. It's destroyed instead.
Some investors believe the fact that the supply of ether will be limited by burning could cause explosive price growth.
But the influence on price is far from certain, developers say. It also depends on things like transaction volumes, which determine how big gas fees are and so how much ether is destroyed.
"Until it's deployed, we don't know exactly what the effect will be in terms of ether burned," Ben Edgington, an ethereum developer at ConsenSys, said.
Transaction fees won't necessarily be cheaper
Transaction fees on the ethereum network may fall because a more predictable base fee is likely to help users overpay less often than under the highest-bidder-wins system.
But EIP-1559 does not aim to reduce transaction fees - only to make them more predictable. The base fee itself will vary, going up when the network is busier and down when things are calmer.
Bigger changes are coming to the ethereum network
EIP-1559 is small compared with ethereum 2.0 - an overhaul of the network's entire infrastructure that developers hope will be complete by early 2022.
Ethereum 2.0 will see the network change from a "proof-of-work" system to a "proof-of-stake" system. Under proof of work, miners use vast amounts of computing power to verify transactions. But under proof of stake, users will put forward ether to gain the right to verify transactions and earn coins.
Developers are also working on scaling up the ethereum network by adding more side networks and linking them. Ethereum insiders hope this will reduce congestion and transaction costs.