The wait is over. After over a month-long delay, the Ethereum blockchain finally forked and activated Constantinople.
These are exciting times for the Ethereum community. The Constantinople upgrade proposes to remove significant technical roadblocks that – till date – hampered the project’s growth. First, the Hard Fork paves the way for Ethereum’s broadly delayed scaling roadmap. And second, it improves Ethereum’s network efficiency and fee structure.
Ethereum's Constantinople and St. Petersburg network upgrades are less than a week away! Click this post for more info and what you need to do to prepare #Constantinople #StPetersburg #Ethereum https://t.co/ZMuHjgiGWj
— Ethereum (@ethereum) February 23, 2019
Atop that, the blockchain upgrade tends to revamp Ethereum’s underlying economic policies and the obstruction of the “difficulty bomb,” a part of the code which slows the creation of blocks on Ethereum chain to a complete halt, eventually activating what the community calls an “ice age.” In general, the new economic policy could turn into a fee-cutter for Ethereum miners. Nevertheless, the core development team believes that the new financial framework would be well-received by all in the long term.
Understanding Ethereum Economic Policy
Per the proposed EIP 1234, a part of five significant upgrades attached with Constantinople activation, Ethereum removes the difficulty bomb, as explained above. It means that miners would be able to mine Ethereum blocks at a faster rate. It will lead to a reduction of reward per block from 3 ETH to 2 ETH.
The purpose of EIP 1234 is to decrease ether issuance. Ethereum so far had enjoyed an uncapped inflation model – the project practically was without an economic policy.
Afri Schoeden, the author of EIP 1234, said that the upgrade would allow Ethereum to stabilize its ether supply rate. At the same time, it would delay the difficulty bomb. Still, critics argued that thinner profit margins for miners would push them out of business. They also added that big miners, equipped with expensive ASIC machines, would gain a monopoly over the Ethereum network and would make it more centralized than before.
But, according to crypto-economist Alex Kruger, the fork will not be painful to many.
“After Constantinople, assuming ETH around $155, only pro miners with electricity above $0.075 would be operating at a loss. Meanwhile, hobbyist miners don’t care as much about operating at a profit or loss.”
1/ $ETH mining operational breakeven, paying $0.06 $/kWh for electricity, currently stands around $67 (estimates depend on operational costs other than electricity). For those buying 2nd hand RX580 GPUs and depreciating them in 1 year, breakeven after depreciation stands at $165
— Alex Krüger (@krugermacro) December 18, 2018
A More Bullish Ether
For those who speculate on the value of Ether tokens, Constantinople is a piece of good news from an economic point of view.
Based on the classic demand-vs-supply theory, Ethereum’s native token Ether could be due for a big push towards the upside. At least, in the near-term, speculation would run higher on Ethereum’s capability of solving scaling problems. Atop that, a “supply bleeding” killer solution in EIP 1234 would assert ether holders with its long-term investment potential.
The Constantinople activation expects to increase $67 breakeven costs for miners to $101. While it would push some small miners out of business, which could lead to a short-term downtrend as marginalized miners would sell their rewards for fiat, the ether rate could normalize after a post-fork adjustment period.
“The increase in breakevens is not bullish on itself. Price does not follow breakevens, and in crypto, breakevens do not represent a floor,” stated Kruger. “However, once mining is past the initial (painful) adjustment period, less mining supply mined by fewer miners will be decidedly bullish.”
The ETH/USD rate at the time of the press was 135.18.
Disclaimer: The author holds Ether in his cryptocurrency portfolio.