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EIP 1559 and the Advent of ‘Ultra-Sound Money’

The arrival of EIP 1559, Ethereum’s big upgrade, changed the supply-and-demand calculus for the smart contract giant.

EIP 1559 and the Advent of ‘Ultra-Sound Money’
Big Story 2021: This article is part of our Year in Review series.

Ethereum Improvement Proposal (EIP) 1559 was perhaps the most anticipated update in the history of the world’s most valuable smart contract platform. The main reason: EIP 1559’s “base fee,” which is burned as a part of every Ethereum transaction. 

In other words, the base fee, paid in ETH, is permanently removed from the cryptocurrency’s circulating supply. This reduction in supply is called deflationary pressure, which, with everything else being equal, drives up prices while inflationary pressure drives down prices. 

EIP 1559 gave rise to the possibility of ETH becoming a currency whose supply decreases over time. Ethereum developer Justin Drake joked on Twitter that if Bitcoin was sound money, EIP 1559 made ETH “ultrasound money.” The concept was then championed by the Bankless content platform and thus the meme was born.

Inflationary Currency

Delivered in August, EIP 1559 has in fact added significant deflationary pressure to the cryptocurrency — more than $4.8B of ETH has been burned since the update, according to watchtheburn.com.

With the $7.2B in ETH issued to miners since EIP 1559, Ethereum is still an inflationary currency. Issuance has fallen by 67% since the deployment of the upgrade.

The base fee adjusts on a block-by-block basis based on the demand to transact on Ethereum — with more demand to transact comes a higher base fee and vice versa. The amount the base fee can change is fixed which has led transaction costs to become more predictable.

Notably, EIP 1559 hasn’t decreased gas prices much — average gas prices are roughly the same as during the peaks of DeFi summer in 2020 and early 2021.

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