Crypto Weekly: The regulation saga continues
Summary: It has been an intense week in the US as the Senate cannot agree on the infrastructure bill. Presently, it looks like a less favorable outcome for the crypto-market. On the technology side, the London update was successfully implemented on Ethereum, starting to burn Ether paid in transaction fees.
The US infrastructure law saga continues
We wrote last week about the infrastructure bill in the US, which intends to heavily regulate the crypto-market if passed, and a lot has happened since. Throughout the week, several cryptocurrency exchanges and think tanks continued pushing to get the definition of brokers to specifically exclude miners, validators, and software developers, so they do not have to comply with the bill. Due to the nature of cryptocurrencies, miners and validators are simply not able to comply with the bill, specifically the know-your-customer (KYC) procedures, due to technical limitations in the crypto software protocol. Last week culminated when several senators formed an amendment to the bill explicitly excluding miners, validators, and software developers from the definition of brokers. In essence, the bill would then only define brokers as someone who is a broker like cryptocurrency exchanges.
The voting of the amendment has been postponed over the last couple of days before ending on Sunday, where the United States Senate voted in favor of ending the voting of amendments before the final vote tomorrow. Correspondingly, it is not sure whether the Senate will vote on the amendment at all. One of the senators behind the amendment, Senator Cynthia Lummis, wrote today on Twitter that she assumes that they cannot obtain a vote on the amendment. Though, if they do, it will most likely pass. Conclusively, without any doubt, the last thing about cryptocurrency regulation in the infrastructure bill has not yet been said.
Burning Ether while staking issues new
On Thursday last week, Ethereum’s London update was successfully implemented. The update contains several improvements to the network. The most notable improvement is EIP 1559. EIP 1559 changes the way users pay transaction fees on the network, making the fee sizes more predictable. From being solely based on an auction, the fees are now based on a fixed fee with the option to tip miners. Concurrently, some of the fees are now getting burned instead of solely being compensated to miners, in order to limit the inflation in Ethereum. As the fixed fee is greatly based upon the demand for transactions on the network, it is still fluctuating rather significantly. The amount of burned Ether fluctuates in line with the fixed fee, meaning it changes how much Ether get burned from block to block it. Some blocks burn close to 0 Ether, whereas other blocks burn over 10 Ether. Since the implementation on Thursday, in total around 17,000 ETH worth around $50mn have been burned.
It is, however, important to notice that the miners are still getting compensated with Ether when confirming blocks, as the mining reward has stayed the same at around 2 ETH per block. The mining reward is made of newly issued Ether to the supply. As the amount of Ether getting burned in a single block does not often exceed the block reward of 2 ETH, the cryptocurrency is still inflationary. Though, not to the same extent as before the London update. In theory, with the update, the cryptocurrency can constantly be deflationary if the fees increase significantly. The protocol has experienced this multiple times since the update, where the fees suddenly increased significantly, resulting in a deflationary supply for some blocks in a row before decreasing again.
The burning mechanism can possibly affect the price short-time as miners are being compensated with less Ether, thus limiting potential sell pressure from them. On the other hand, what is often not considered is the fact that the ETH 2.0 staking contract is also issuing new Ether. It has currently issued over 200,000 Ether since it went live on December 1st, 2020. At present, these Ether are locked. They will first be unlocked when the merge happens from proof-of-work to proof-of-stake likely somewhat next year, but they are crucial to consider when looking at the total supply long-term. Correspondingly, it will take some time for the burning mechanism to catch up with the newly issued Ether on ETH 2.0.