Ethereum remains in a state of flux, perpetually traveling away from the proof-of-work algorithm that drives it. Yet, in this interim period, updates can cause unintended consequences. The recent London hard fork brought with it EIP-1559 – a proposal that changed the basic fee structure paid to Ethereum miners for their participation. While some worried that the change would remove mining incentives, it appears the deflationary aspects have done the opposite – with Ethereum’s hash rate increasing and miners holding tight to their mined ETH.
The cryptocurrency market appears poised for a new attempt at all-time highs, consequently driving developers to create new, profitable projects on the Ethereum platform. As with previous high points, Ethereum’s proof-of-work algorithm stymies new developers, as gas fees become prohibitive for smaller-scale users. This well-known issue gained enough notoriety to receive a specific mention from government bodies. Yet, Ethereum miners continue to show faith in the original smart contract provider.
What is EIP-1559?
Ethereum Improvement Proposal 1559, or EIP-1559, establishes criteria for Ethereum transactions. Previously, all transactions operated on an ‘auction’ style system in which external parties struggled to estimate the size of transaction fees. EIP-1559 establishes a base fee, with an additional option of ‘priority’ fees that incentivize faster validation.
Critically, EIP-1559 also redirected the base fee, causing the blockchain to now burn that initial cost. Through the process of burning ETH with each transaction, EIP-1559 effectively makes Ethereum a deflationary asset. While this does result in less Ethereum flowing to miners, it also increases the inherent value of the ETH that they do earn. Thus far, miners seem perfectly willing to go along with the new fee structure.
Miners Accumulate $6.1 Billion since the London Hard Fork
The London hard fork took place this past summer, and Ethereum miners have drastically increased their ETH holdings in the interim. This additional Ethereum brings their total holdings to approximately 22.3 million ETH, or $70 billion. This represents nearly a fifth of all held Ethereum, making these miners a considerable market force.
Given public knowledge of Ethereum’s current state and future updates, it makes sense for these miners to hold on to their coins. While the price of Ethereum may fluctuate over time, it remains the most desirable platform for dApps and legitimate projects within the cryptocurrency space. The deflationary aspects of EIP-1559 coupled with increased adoption of decentralized technology will almost certainly benefit these miners in the future.