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Major Ethereum Network Upgrade & Future Price Implications


The Constantinople hard fork has been rescheduled for February 27th 2019 following the discovery of a “reentrancy” exploit. The vulnerability was reported by ChainSecurity – full details can be found here.

In 2 days time on January 16th, Ethereum will deploy its first network upgrade since October 2017. Dubbed “Constantinople”, the upgrade will implement several “Ethereum Improvement Proposals” (EIPs) on the Ethereum network, improving on-chain and off-chain transaction efficiency as well as reducing the amount of Ether that enters circulation each year. For developers, the transaction efficiency EIPs of Constantinople are particularly exciting as they will significantly lower gas costs and increase the speed at which computations are made. However, for those interested in the immediate price implications of Constantinople, it is the circulating supply of ETH that is the most appealing change.

Ethereum Supply Growth Drops By A Third

With each block that is mined (roughly every 15 seconds) 3 Ether is “minted” and awarded to the successful miner. When EIP1234 is implemented on January 16th as part of the Constantinople upgrade, this reward will drop from 3 Ether to 2 Ether. This has become known as the “Thirdening”, a nod to Bitcoin’s “Halvening” of the block reward every 4 years.

The purpose of this block reward reduction is to prepare for the 4th and final Ethereum network upgrade, Serenity. Serenity, which has been delayed until at least 2020, will implement the highly anticipated “Proof of Stake” consensus mechanism – a low-energy alternative to the current energy-intensive “Proof of Work”. Once Serenity is deployed, the mining reward will be removed entirely with ETH issuance expected to fall from today’s level of 7.4M/year to a post-Serenity level of 250K/year.

EIP1234 continues to reward miners for their efforts (not doing so would compromise the security of the chain), however it also recognizes that past delays to the deployment of Serenity require a rebalance to the number of ETH tokens issued so as to ensure scarcity.

ethereum supply issuance over time

Credit: Eric Conner

Decentralized Finance & Locked Ether

Constantinople will have a glaringly obvious and immediate impact on the amount of ETH entering the ecosystem. However a much lesser discussed force is also at play – Decentralized Finance (DeFi).

Last year, using nothing but a collection of smart contracts, I was able to lend myself some money using Ether as collateral. By depositing ETH, I took out an interest-free loan of DAI – a stablecoin pegged to the US Dollar – in the complete absence of a middleman, lawyer or agent. Without going into the technical detail and economics of DAI and MakerDAO governance token, the implications were clear; I could use ETH to create my own price-stable token that could be spent however I chose, with all the benefits of a decentralized blockchain cryptocurrency (secure, private, self-sovereign, low-cost and so on).

MakerDAO’s platform launched last year and the number of ETH now locked as collateral in these loans today is in excess of 1.8M. Or said differently, over 1% of Ethereum’s total supply has been locked as collateral in MakerDAO.

MakerDAO is not the only DeFi application being built on Ethereum. Another recently launched decentralized app, Compound, allows users to lend and borrow Ethereum assets via smart contracts alone. The amount of ETH used as collateral in Compound is a fraction of Maker (25,000 at the time of writing), however the trend is clear: as the Ethereum network grows and more decentralized finance apps are deployed, a higher proportion of Ethereum will be locked in order to benefit from these applications.

amount of ETH locked in defi as collateral

Source: Mike McDonald

When considering the immediate impact of Constantinople and the longer-term effect of Serenity (reducing coin supply inflation to near-zero), the scarcity property of Ethereum is all but secured. Combine this with the rapidly growing development (and demand) of decentralized finance apps and there is an extremely bullish mid-run case for ETH, not only in terms of circulating supply but demand too.

This, still, is just a tiny fraction of the current and future Ethereum ecosystem. A plethora of other applications outside of decentralized finance are also showing signs of incredible potential; from crypto-collectables and trustless gambling through to in-game assets, tokenized securities and more. This year may be less exciting from an Ethereum price perspective but the amount of work going into development is more focused and faster paced than ever. Bright days are most certainly ahead!

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Nick Founder