Institutional crypto fund manager Grayscale Investments believes the introduction of the proposed EIP-1559 fee and burn mechanism could create “a positive feedback loop for Ether’s price” should network activity continue to increase on Ethereum.
That’s because the proposal could result in Ether being burned at a rate exceeding the creation of new supply, significantly shifting the supply-demand dynamic underpinning the ETH markets.
In Grayscale’s Feb. 4 report, Valuing Ethereum, the firm discussed the role Ether plays as a “consumable commodity” within the Ethereum ecosystem and considers the impact EIP-1559 could have on the network’s economics.
EIP-1559 was proposed by Ethereum co-creator Vitalik Buterin and Ethhub co-founder Eric Conner in April 2019 and seeks to implement a fee market and burn mechanism to bring Ethereum’s often-skyrocketing gas fees under control. In December, Buterin again urged Ethereum to adopt EIP-1559.
The proposal advocates introducing a “base fee” that will be burned to execute transactions alongside a tip that miners will receive. The base fee will then increase or reduce based on whether the network is above or below 50% capacity, allowing wallets to better predict fluctuations in gas prices, and establishing Ether as the network’s sole native economic unit.
Within the context of the Ethereum’s economic ecosystem, Grayscale argues EIP-1559 would “transform Ether from a medium of exchange asset to a consumable commodity,” making it more akin to “combustible gas than money.”
Should the burning of Ether to pay for transactions outpace the creation of new Ether supply, Grayscale speculates that EIP-1559 could be extremely bullish for the ETH price:
“If activity increases and the supply of Ether decreases due to burning, a supply and demand curve would indicate an increase in the unit price of Ether because each unit would need to satisfy a greater proportion of economic activity. If EIP-1559 is implemented, it would institute a consumption mechanism that should serve as a positive feedback loop for Ether’s price.”
In October, one million Ether would have been burned over the preceding 12 months if EIP-1559 had been implemented at the time.
While EIP-1559 has received the support of most Ethereum developers, the mining community has unsurprisingly rallied against the proposal to burn the lion’s share of the fees they currently collect. Last month, eight mining pools representing 30% of Ethereum’s hash rate joined a consortium of pools opposing EIP-1559.