This week, IntoTheBlock checks out activity on Ethereum and expectations ahead of the London Hard Fork in August.
Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
Ethereum Advances With London Hard Fork Set for August
Crypto prices continue to trade in a sideways trend for the most part. Notably, while Bitcoin is down approximately 3% over the past seven days, smart contract platforms like Ethereum, Cardano and Polkadot have managed to increase by 2%.
For the second largest crypto-asset, a much-awaited upgrade is set to launch soon. With EIP-1559 planned to launch with the London Hard Fork on August 4th, Ethereum on-chain activity shows the development of a bullish trend.
What Is EIP-1559 Anyways?
You may have heard the buzz surrounding the Ethereum Improvement proposal 1559, originally introduced by Vitalik in 2019. A common misconception is that EIP-1559 lowers fees on Ethereum; it does not.
Instead, what it does is lower the volatility of Ethereum fees. EIP-1559 achieves this by introducing a base fee, which adjusts dynamically based on transaction activity. When gas prices increase above a gas target, the base fee increases exponentially, disincentivizing activity until gas drops. Moreover, the base fee is burnt, meaning that the ETH used to pay for this transaction cost is virtually removed from circulation.
This last part is what most Ethereum holders are excited about. By burning fees, Ethereum has the potential to become deflationary. This also aligns with the incentives of Ether holders and Ethereum users: high activity means a significant amount of ETH will be burned, and decreasing supply should lead to higher prices, all other things being equal.
Bullish On-Chain Indicators
Fees on Ethereum have quickly increased as demand outstrips capacity. Compared to the 2017 bubble, total fees on Ethereum are significantly higher as usage of decentralized applications grows.
Although EIP-1559 does not solve the issues of high gas costs, it benefits Ethereum holders directly as a result of these high gas fees. When it comes to decreasing gas fees, that is where upcoming layer 2 scalability solutions like Arbitrum play a role.
With the releases of layer 2 solutions and the London hard fork, both scheduled to occur in the next six weeks, anticipation and demand for Ethereum has picked up. This pattern is apparent in funds flowing in and out of centralized exchanges.
Exchange flows have become an important tool to track positioning for a particular crypto asset. This is the case as inflows into exchanges tend to increase prior to or during price crashes, a signal that holders are depositing with the intention to sell.
Conversely, outflows from centralized exchanges suggest buying activity. This is the case as holders wish to have their crypto-assets stored safely in a hard wallet or into a decentralized application where they can earn a yield on top of their assets.
Netflows are the difference between inflows minus outflows. Therefore, negative netflows point to a high amount of outflows relative to inflows. In Ethereum’s case, netflows just hit a new record low.
A net amount of $1.3 billion worth of ETH left centralized exchanges on July 2nd. This drop can be interpreted as bullish, suggesting that holders are leaving exchanges for more secure or yield-generating locations.
Overall, this pattern points to the likelihood that Ether holders are accumulating as the London hard fork approaches. Ultimately, this signals positivity as incentives arising from high fees are expected to align with Ether holders’ best interests.
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