See more: Long-term Crypto Investment for Newbies
The Ethereum London Hard Fork is an update to the Ethereum blockchain, coming soon after the Berlin hard fork in April 2021. The London Update makes significant changes to Ethereum’s transaction fee system, which has since has long been a controversial topic. The update also prepares for the planned release of Ethereum 2.0 by making adjustments to its consensus model.
However, London is considered controversial by some due to the significant changes to cryptocurrency trading and mining fees. The exact effects the changes will have on users and miners are not fully known, but they will only be temporary as Ethereum 2.0 is coming.
Ethereum London Update
Ethereum’s London Update is a hard fork that introduces two new Ethereum Improvement Proposals (EIPs). With the release of Ethereum 2.0 (Serenity) scheduled for 2022, the London update prepares for the move to Proof of Stake. Miners will see mining difficulty slow down to coincide with Serenity. Since London is a hard fork, all nodes must use the new rules and the latest version to continue mining and validating.
The most significant change will be transaction fees, including a new deflation mechanism. Previously, users entered auctions to pay their gas fees. Miners will prioritize transactions based on the added fee and use the fee as a reward for adding it to a block. Now, each block will have a fixed, associated fee for replacement. This change is a result of EIP-1559, which was included in the London update alongside EIP-3238.
Ethereum Improvement Proposals (EIPs) are specifications that outline new features for the Ethereum blockchain. Developers create their proposals along with those from the Ethereum community. Anyone can create an EIP and submit it for discussion before the community accepts the proposal.
Each EIP follows the principles outlined in EIP1:
The EIP shall provide a brief specification of the feature and the rationale for the feature. The EIP author is responsible for building consensus in the community and recording dissenting opinions.
An EIP author should follow a predetermined process before approving an EIP, involving peer review and manuscripts. Once the community is happy with the proposal, they can add it to the release.
EIP-1559 is a proposed change to the way users pay gas fees on the Ethereum network. This EIP was created by the founder of Ethereum, Vitalik Buterin and a group of other developers.
Over time, the average fees charged by Ethereum users have become too expensive for small transactions. For example, if the network fee is around $20 (USD), it is not worth it to send $20 worth of Ether (ETH) or another digital asset. These high fees make the network less attractive, especially for beginners.
EIP-1559 proposes a new transaction pricing mechanism that would instead create a base fee per block. The blockchain will burn fees, reducing the overall supply of Ether (ETH). This effect will create deflationary pressure on cryptocurrencies.
The base fees vary per block depending on network demand. If a block becomes more than 50% full with transactions, the base fee will increase and vice versa. This mechanism tries to keep a half-full balance for the majority of blocks.
You can also add a miner tip as an incentive to skip your transaction queue. However, Ethereum manages to keep blocks around 50% full even without a tip. With so much space available in each block, the tip will most likely only need to be small to get to the front of the queue.
Integrate into Ethereum is a difficulty ticking time bomb that makes it harder and harder to mine Ethereum. When we reach the difficulty bomb, the time it takes to mine a new block will be so long that profits for miners will drop and transactions will be too slow. The developers want to make sure that miners have no choice but to stop mining Ethereum 1.0 and switch to Ethereum 2.0 upon release.
However, Blockchain will reach this point too soon. To ensure the network incentivizes validators to Ethereum 2.0’s Proof of Stake consensus model at the right time, EIP-3238 will delay the ticking time bomb.
Without this, it could be possible that miners continue to use Ethereum 1.0, similar to the split seen with Ethereum and Ethereum Classic. The delay of the time bomb will lead to a 30-second block time ice age around Q2 2022. By this time, the merging of Ethereum 1.0 with Ethereum 2.0 should be complete.
Does the London update affect the community?
There are mixed emotions when it comes to network upgrades in London, mainly in regards to transaction fees. Although miners are preparing to end Proof of Work with Ethereum 2.0, this update significantly changes the fees that miners receive. This reduction can lead to a decrease in the profits generated by the miners. Another concern is that Ethereum mining could become more centralized. Some argue that only the biggest miners with the lowest energy costs can operate profitably.
While we cannot say for sure, deflationary mechanisms are expected to increase the price of ETH. Such an expectation may be related to the fact that after the update, Ethereum will burn the ETH base fee of all transactions. Blockchain.
What does the London update mean for users?
Similar to Bitcoin, the current mechanism works similarly to bids. The more transaction fees (or gas fees) you pay, the more likely your transaction will be confirmed by miners and faster. But after the London update, you won’t need to choose the gas price you pay when making Ethereum transactions.
Instead, you’ll only see the base fee, plus an option to tip the miner. However, the base fee can change between the time you send a transaction and when it is added to a block. To avoid this, you can set the fee limit to be the maximum you want to pay. If a miner includes your transaction in a block where the base fee is less than your fee limit, the network will refund the difference.