Ethereum on-chain transaction volume and mining revenues reached record highs during the month of May, The Block data showed.
Ether mining brought in $2.35 billion in total revenue, an increase of 42.4% from the previous month. Meanwhile, Ethereum miner transaction fees increased 43.9% to reach $1.03 billion. Mining revenue consists of transaction fees, or costs associated with transacting on ethereum, and block subsidy payouts to miners.
Miners who successfully create a block are rewarded in 2 freshly minted ether and all the transaction fees within the block. A miner may also get 1.75 ether for an “uncle block,” which is a valid block created simultaneously to the successful block, by another miner.
Revenue soared amid a record run-up in the world’s second largest cryptocurrency. Ether hit an all-time high above $4,300 on May 12. The token has pulled back 41% since then and now trades around $2,500.
Ether – the world’s second-biggest cryptocurrency – soared to record highs above $3,600 in the week to Friday and had outstripped bitcoin with year-to-date returns of around 370%.
Analysts said a key catalyst has been growing interest from big players such as the European Investment Bank in the Ethereum blockchain network, on which ether runs.
Investors have been drawn in by the possibility of building decentralized financial contracts on the system and other applications such as non-fungible tokens, or NFTs.
But upcoming changes to Ethereum that aim to make the network bigger and more sustainable are also exciting investors, as they could send the ether price soaring even further.
Insider spoke to Ben Edgington, who is working on the upgrades for development company ConsenSys. He laid out the roadmap for the changes.
The ‘London’ upgrade will start to destroy ether coins
After tweaking how transaction payments work in April, Ethereum developers are preparing for a major overhaul to the fees system. The changes are due in mid-July, according to Edgington.
Under the current system, users send what’s known as a gas fee to miners as payment for transactions to be verified, in a kind of auction. Miners complete transactions, and create cryptocurrencies, by using computing power to solve puzzles on the network.
But when the network is busy – as it increasingly is – the auction system means users have to bid larger amounts and estimate the appropriate fee, leading to volatility and sharp price rises.
To address the problem, Ethereum’s developers have agreed to a major change, known as EIP-1559 in crypto jargon and set to take place during an event called the “London hard fork.”
Under the new system, gas fees will be replaced by a mandatory and automatically determined base fee, which would fluctuate according to network congestion. Users will be given the option of paying miners tips if they need transactions completing quickly.
But the most exciting part for many investors is that the network will start to destroy or “burn” some of the gas fee.
Edgington says: “Potentially, more ether will be burned that will be generated for miners.” He added that this could make the supply of ether decline over time, “which actually trumps bitcoin monetary policy, which is fixed.”
One analyst said earlier this year the burning of fees might lay the groundwork for “explosive growth” in the ether price.
Ethereum 2.0 aims to boost the network’s size and sustainability
Developers are most excited about the momentous changes collectively known as Ethereum 2.0, which aim to make the network bigger and more sustainable.
First up on the road to Ethereum 2.0 is what developers are calling The Merge: a complete change in the underlying mechanics of the network, which Edgington says will hopefully be completed by the end of 2021, or in early 2022.
Currently, computers compete against each other to solve complex puzzles to verify the network and mine ether in what’s called a “proof of work” system.
This makes the network secure, because it would take huge and costly amounts of computing power and energy to hack into – but is very bad for the environment.
Ethereum will instead be moving to a “proof of stake” system. This means people can validate transactions and mine according to the number of coins they hold and are willing to offer as a sort of down payment, Edgington said.
Each user that wants to verify transactions – and thereby earn themselves rewards – has to put up a sizable stake, for example 32 ether worth over $120,000.
The idea is that anyone wanting to attack the network would have to earn enough ether to pay more than the collective value of all the stakes to start altering the blockchain in a damaging way.
Edgington says there is already around $10 billion staked the proof-of-stake network, known as the beacon chain, which developers launched in December.
Ethereum developers are working hard to shift across the network onto the new system – The Merge – but it’s not without risks.
One developer has described the process as “replacing the engine of an airplane while it is still flying.” But they added: “The code in use will have been exhaustively checked, battle-tested, and checked again.”
‘Sharding’ aims to expand the network
Yet Edgington stresses that “moving to proof of stake is not a scalability solution.”
To try to expand Ethereum so that more applications such as NFTs, or decentralized finance contracts, can be built on it, developers will create new networks in a process known as sharding.
“This is like running 64 blockchains in parallel with the beacon chain to increase the capacity,” Edgington says.
Simply put, creating more blockchain systems and tying them together by linking them to the main beacon chain should expand the overall network and make it more efficient, as opposed to the current system where everything is done on one big network.
“I expect within a year of delivering the proof of stake we’ll have delivered the sharding solution,” Edgington says. “But nobody’s making a strict project plan, or deadline about this. It’s ready when it’s ready.”
Developers on the Ethereum network have defended major changes that are set for the summer that will destroy ether tokens and cut the fees paid to miners, saying they’re popular with users and could boost the cryptocurrency’s price.
The planned alteration to the network, known in crypto jargon as EIP-1559, “is very popular among Ethereum users as it potentially makes Ethereum a deflationary asset,” Ben Edgington, a developer at ConsenSys, a company closely involved in the network, said on Tuesday.
Ethereum developers approved significant changes to the network that runs the ether cryptocurrency earlier in March. They are set to overhaul the current system under which users send tokens to miners to pay for transactions to be completed in a kind of auction process.
The changes have sparked anger among miners, however, as they would reduce the fees they receive. Some have even proposed a form of strike.
Yet developers say users support the changes, partly because the reduction in coins could lead to the price of ether rising sharply. Ether traded at around $1,800 on Wednesday. The token has gained around 145% so far this year.
Dan Finlay, lead developer on popular Ethereum wallet MetaMask, said: “Its purpose is to provide a more predictable transaction pricing system that reduces overpayment, and has some deflationary economics as a side benefit.”
Under the changes, which will likely come into force in July, users will send a base transaction fee to the network that would then destroy or “burn” ether tokens, thereby reducing the number of coins in circulation.
It will move the system away from the current mechanism, in which users have to bid to have their transactions included in blocks by miners, which can make fees very costly at times.
Edgington said these issues are “a significant problem for the usability of Ethereum and a barrier to the broader adoption of Ethereum by non-specialists.”
Lex Sokolin, co-head of fintech at ConsenSys, said the changes will take the network fees “from having an unpredictable and unbounded pricing mechanism to something that is much more predictable.”
The anonymous founder of Pylon, a major North American ether miner, said there was a lot of “turmoil” in the Ethereum world. They said miners had spent time and money building facilities, and now could be faced with heavy losses due to the changes.
“It goes back to the point [that] developers don’t mine, so they could care less about a miner, and miners don’t develop, so they could care less about reducing the congestion,” they said.
Some ether miners threatened to effectively go on strike, or try to disrupt the system in other ways in protest at the changes.
But there are signs of peace breaking out, with miners proposing their own EIP – which stands for Ethereum improvement proposal – that would raise their rewards and gradually lower them.