Crypto Coin Outperforming Bitcoin Is About to See Supply Reduced

(Bloomberg) -- Ethereum blockchain developers approved one of the biggest changes to the network since its inception in 2015, a shift that could spur even bigger gains in the price of its native cryptocurrency Ether.

The move will reduce the amount of outstanding Ether by destroying some of the tokens every time it’s used to fuel transactions on the world’s most-used blockchain. Known as EIP 1559, the change solves a current problem: Ethereum users can only estimate how much Ether will be needed for transactions to be processed, a guessing game that has spawned sites such as ETH Gas Station to help people know how much to pay. EIP 1559, which will become part of an upgrade in July or August, will embed an average price into the network itself making the guessing game obsolete.

The reduced supply of Ether will likely lead to rising prices as demand for the coins increases, said Eric Turner, director of research at Messari, a cryptocurrency analytics firm.

“This is probably one of the biggest milestones we’ve seen recently,” he said. Until EIP 1559 goes into effect after being approved Friday, the supply of Ether was theoretically infinite, leading to criticism that its underlying monetary policy was weak and inflationary. “Now, they’re actually controlling inflation on Ethereum” and “in some cases you’re looking at negative inflation so it’s definitely important,” Turner said.

Ether has seen an already incredible price gain in the past 12 months, along with Bitcoin and other digital assets. Ether has risen about 560% in the past year, while Bitcoin is up about 430%, according to data compiled by Bloomberg. Unlike Ether, Bitcoin has had since its start in 2009 a fixed supply of 21 million coins that will ever be created. That difference has led critics of Ethereum to say it shouldn’t be viewed as a similar digital currency as Bitcoin.

Tim Beiko, a senior product manager at ConsenSys who’s leading the protocol team implementing EIP 1559, compared the current fee environment in Ethereum to a gas station where each of the four pumps has a different price. Going forward, “we’ll gauge demand for the network and we put that average price as part of the network itself,” he said. EIP 1559 “fixes a bug in the economics of Ethereum we’ve known about from the start.”

The proposal also will change a strange feature in Ethereum that no one really saw coming. Users can now pay an Ethereum miner to process their transaction with a credit card or another cryptocurrency, undermining Ether’s role in its own blockchain, Beiko said. EIP 1559 makes Ether the only way to pay for transactions on the network.

“It cements Ether’s role in the ecosystem,” he said.

©2021 Bloomberg L.P.