Ether on the road to 3k
With Ethereum’s ‘London’ hard fork about to go live, it's worth revisiting why analysts think ETH is heading for new highs.
Editor’s note: An update of our story from February ahead of this week’s ‘London’ hard fork:
Ethereum (ETH), the world’s second-biggest crypto by market cap, reached a record-breaking high of USD 1,439 in February, the first time the digital asset has crossed the USD 1,400 threshold since January 2018.
That put ETH’s YoY gains at above 65 per cent, a 6-times multiple over cryptocurrency leader Bitcoin and beating both Chainlink (LINK) and Polkadot (DOT) for the fastest-growing title.
Even with the short-term correction experienced in January, ETH became (and continues to be) one of the strongest performers on the top 10 digital asset league table.
On fundamentals alone, there weren’t any apparent triggers driving Ethereum’s rise at the start of the year. ETH had been hovering around the critical resistance level for more than a fortnight after climbing to USD 1,350 in early January.
Today, ETH finds itself in uncharted territory, with crypto watchers now anticipating the number-two cryptocurrency passing the next major milestone, the psychologically important USD 3,000 price point. If it hits that level, ETC will have seen a gain in the order of 50 per cent higher than its February highs.
Analysts and pundits believe three major events will help make a 3K ETH achievable.
Event 1: The launch of Ethereum futures
The Chicago Mercantile Exchange (CME) announced in December that it plans to launch Ethereum futures this month. Regulatory approval still needs to be granted by America’s Commodity Futures Trading Commission (CFTC), but this is expected to be granted imminently.
Derivatives are trades that take the form of a contract, enabling investors to bet on the future price of an underlying asset (typically a commodity like oil, wheat, iron ore, etc.), without having to actually own it. The CME is the world’s largest derivatives platform, so getting the nod of approval from a stalwart of traditional finance marks an important milestone in the broader acceptance of the merits of cryptocurrency generally, and ETH specifically.
Event 2: The phase-one rollout of Ethereum 2.0
Ethereum is in the midst of moving its underlying blockchain from a Proof-of-Work to a Proof-of-Stake consensus mechanism. The idea behind the change is to make ETH faster, more scalable, and more efficient as a platform. The new ‘Ethereum 2.0’ moves forward in four phases, each setting the technical framework for the next until the full transition is finished.
Ethereum’s ‘Phase 0’ went live in December and included implementing what Ethereum calls the Beacon Chain. It’s a new software layer for the blockchain capable of coordinating activity across the various new Ethereum shard chains.
Next up in Ethereum’s development pipeline is ‘Phase 1,’ which will include the launch of 63 shard chains. Once in place, all transaction activity across the Ethereum network will be divided dynamically and processed by the separate blockchains to maximise efficiency and stop processing bottlenecks.
The new system architecture means transactions won’t have to be validated by the full network, a single shard chain can handle it. That promises to bring down the time required to confirm transactions dramatically. The overall network will gain capacity and be able to work with much bigger transaction volumes without falling victim to congestion, currently a big issue and source of complaints.
Event 3: More equitable mining fees
Ethereum isn’t just a cryptocurrency, it’s also a platform for blockchain application development. When an Ethereum-based decentralised application (dapps) takes an action, the Ethereum blockchain handles it as a transaction. Transactions have a fee attached to them, as it’s the only sure way to incentivise ETH miners to validate them.
At the moment, Ethereum transaction fees are set by an auction-style system where users who attach the highest fees to their transactions are more likely to attract miners’ attention. This marketised approach makes for unpredictable and sometimes eye-watering fees during periods of heavy transaction activity. Ethereum has a reputation for experiencing congestion any time there’s a spike in trading activity. If Ethereum’s price goes sharply up or down, and crypto traders try and execute a trade en masse to take advantage, Ethereum can experience slowdowns.
Ethereum’s head honchos are well aware of the issue. Last year, co-founder Vitalik Buterin put forward EIP 1559, an Ethereum Improvement Proposal designed to improve the way ether transaction fees are presented to users. Buterin and a team of developers have suggested scrapping the current auction system favouring a base cost called the BASEFEE, which is determined by an algorithm.
Implementing BASEFEE would mean miners receive a uniform fee for processing all Ethereum-based services or transactions, regardless of rises and falls in transaction volume. The current raft of fee discrepancies that occur for ERC-20 compatible protocols and exchanges would be largely eliminated. Buterin’s proposal does come with an option for users to give miners a tip to make their transactions get processed more quickly.
The bit of EIP 1559 likely to have the biggest impact on Ethereum’s future price is the launch of Ethereum ‘burning’, which would enable users to eliminate tokens from existence entirely. This would reduce the circulating supply of Ethereum, and by the laws of supply and demand, push its price up. Buterin and colleagues plan to burn the BASEFEE as well so that most of the Ethereum used to process transactions is destroyed, rather than inflating the overall supply.
Analysts believe this could encourage Ethereum deflation, and help push up its price over time. Buterin’s EIP is expected to go live by early March 2021.
UPDATE: The London hard fork is here
6th August: Ethereum’s much-hyped “London” hard fork has just been activated.
So far, news of the successful upgrade has coincided with a runup in the price of ether (ETH), the native token of ethereum’s blockchain. The cryptocurrency is at $2,610, up almost 4% in the last 48 hours.
Ethereum users have had to endure a long-standing problem with the blockchain’s scalability, and the highly unpredictable and sometimes exorbitant transaction fees that result.
A surge in interest in nonfungible tokens has made the problem worse. NFTs are built almost exclusively on ethereum, as are most DeFi platforms, a crypto sector that is also experiencing explosive growth.
The code changes (which have little to do with that city on the Thames) are designed to fix many of these issues by destroying or “burning” ether coins and changing the way transaction fees work so that they are more predictable.
If you think of ethereum like a highway, London is adding a few lanes to tamp down traffic and standardise tolls.
“It adds a lot of complexity to the fee logic, but it’s an interesting approach that could potentially stabilize the fee dynamics,” said Nic Carter, co-founder of crypto data firm Coin Metrics.