London hard fork on Ethereum: what changes will happen after the update?
London hard fork on Ethereum: what changes will happen after the update?
The London hard fork is the most important network upgrade in recent years as it includes five Ethereum Code Update (EIP) proposals, including EIP-1559 and EIP-3554.
These updates provide for the burning of part of the transaction fees and the activation of the so-called “complexity bomb”. We made a detailed overview of the upcoming London hard fork on the Ethereum network and how it will affect the market.
Why is the Ethereum network hardforking?
Despite its popularity, Ethereum is still far from realizing its full potential. The network infrastructure is not yet ready to be used by millions of people around the world.
Scalability is Ethereum’s main concern. The network is often overloaded: ETH transactions are slow, and the cost of commissions (gas) grows, breaking records. So, in May it reached a historical maximum of $ 70, although a year earlier it was less than $ 0.5.
The popularity of DeFi projects also negatively affects the network load. Ethereum is not a cheap and fast enough blockchain for the DeFi sector. As a result, its use also slows down the development of many DeFi services in the crypto market.
Since 2016, developers have been gradually updating the network to the state of Ethereum 2.0. In this version, an inefficient PoW algorithm that extracts new coins through mining will be replaced with a more energy-efficient PoS algorithm, in which payments are processed by validators, and coins are mined using staking. This should solve the problem of scalability, high fees, and slow transactions.
How are preparations for the London implementation going?
The London hard fork should be launched on block 12 965 000. This was announced earlier this month by Tim Beiko Ethereum developer.
After activating the hard fork, the network will work according to the new rules, which will have to be accepted by all miners of the network. To do this, they will need to update the nodes and mining software. For users who do not own the node and are not involved in mining, nothing needs to be updated.
London is the second hard fork that is changing the gas pricing mechanism on the Ethereum network. In April, the Berlin hard fork was activated, which increased the cost of gas for certain transactions, added several new types of transactions, and also reduced the possibility of DoS attacks and the cost of some operations.
Berlin’s activation affected ETH miners’ earnings. In May of this year, they earned a record $ 2.4 billion, of which $ 1 billion (43.5%) is commission income. In June, miners earned $ 1.1 billion due to a decrease in network activity. At the same time, commission income amounted to only $ 165 million. According to the Bitinfocharts service, the average transaction cost in the Ethereum network in the last month ranges from $ 2.5 to $ 8 and is at the lowest levels since the beginning of the year.
The London hard fork has already successfully launched on several testnets: on June 24 it was activated in Ropsten, on June 30 in Goerli, and on July 8 in Rinkeby. Recall that test networks allow developers to test the functionality of the code in an environment similar to Ethereum and fix vulnerabilities in the code before activating it on the mainnet.
What will change in Ethereum after London is activated?
The London hard fork includes five Ethereum Improvement Proposals (EIP). EIP are technical specifications that describe the new features of the Ethereum blockchain. Developers create their proposals along with the proposals from the Ethereum community. Anyone can draw up an EIP and bring it up for discussion.
EIPs implemented during the London hard fork:
EIP-1559 is aimed at burning part of the commissions that are now going to miners. This is the most important update of the planned hard fork.
Now the system of commissions in the Ethereum network is arranged as follows: transactions must be paid to miners in a special unit of account – gas. Its price is determined by an auction model: the higher the transaction fee is offered by the user, the faster the miners will carry it out. The more popular the network, the more loaded it is, and, consequently, the higher the transaction fees.
EIP-1559 departs from the auction model, replacing it with a fixed fee, which will be determined by a special algorithm based on network congestion. As a result, the gas price will change depending on the state of the network but will be the same for everyone. Once London is activated, it will not be possible to speed up the verification of its transaction due to the higher gas price.
In this case, the commission for the transaction will be divided into two parts: one will go to the miners, the other will be burned. The amount of remuneration to miners – “tip” – is determined by the user.
The developers believe that the activation of EIP-1559 will increase the stability of the network and speed up its operation, reduce the volatility of the gas price and launch a deflationary mechanism – the ETH supply will decrease, and, consequently, the coin will rise in price.
It is important to understand that the cost of commissions will decrease slightly. Users have to pay high fees due to the low network bandwidth. EIP-1559 won’t change anything here. Therefore, one should not expect a significant reduction in the cost of transactions.
It is also important that EIP-1559 is an upgrade of the ETH 1.0 network to PoW. In ETH 2.0, it will not work, because the network will switch to the PoS algorithm.
EIP-3554 postpones the activation of a gradual increase in the difficulty of mining in the Ethereum network every 100,000 blocks until December 1 of this year. This mechanism should reduce the efficiency of mining ETH 1.0 and motivate miners to switch to staking coins in ETH 2.0. But it is likely to also reduce the transactional revenues of miners.
It was originally planned that activation would be pushed back to the second quarter of 2022. But the developers decided that if you activate the “difficulty bomb” later, it will lose its usefulness.
EIP-3541 makes it impossible to launch smart contracts with addresses “0xEF”. This simplifies the execution of smart contracts and will allow the Ethereum virtual machine (EVM) to be updated. For now, this will not affect the operation of the network in any way but will create a directory in it in which there will be a place for further updates.
EIP-3529 – Abandonment of gas compensation in SELFDESTRUCT operation and its abbreviation for SSTORE operations. Now the use of this function allows unscrupulous users to cheat the system, making money on it. Also, the update will help to increase the efficiency of the network.
EIP-3198 – Adds opcodes that will allow the EVM to access the Basic Fee Per Block (BASEFEE). This will make it possible to extend EIP-1559 to smart contract transactions and more efficiently use second-tier solutions such as Plasma.
After activating the London hard fork, the developers will focus on the next update, Shanghai, which should be activated late this year or early next year.
Some miners did not support EIP-1559
Most Ethereum users support the planned updates. But the activation of EIP-1559 is not profitable for miners – it reduces their profits. According to various forecasts, the update will reduce miners’ revenues from 20 – 35% to 50%. Those miners who deliberately overloaded the network in order to increase the commission will lose the most in income. It would seem that a decrease in income by 20 – 30% is not much. But against the backdrop of a decrease in online activity, a general drop in income, and a correction in the crypto market, the decrease in profit from commissions is very upsetting.
It is not surprising that some of the miners opposed the update. They believe that burning coins will not accelerate the price, and solving network scalability problems at the expense of miners is a “robbery” for the sake of the majority.
In March, opponents of the update tried to go on strike – to concentrate more than 51% of the network’s computing power in the Ethermine pool. But the attempt failed. And to seriously carry out a 51% attack, in which miners gain control over the network, no one was going to – it is expensive, the attack is limited in time and its success would ruin the reputation of the entire Ethereum ecosystem.
As a result, miners have no choice but to update their software to continue interacting with Ethereum. Some of them are preparing to become a validator for ETH 2.0, others intend to switch to mining other cryptocurrencies.
Perhaps the miners are right. According to CoinMetrics’ calculations, activating EIP-1559 will not necessarily result in lower gas prices. The rise in the use of the Ethereum network could devalue the potential benefit from a fixed algorithmic fee. CoinMetrics experts believe that it would be much more promising to use second-tier solutions.
How will London affect the price of ETH?
The activation of the deflationary mechanism could be the catalyst for the ether bull market. After all, the number of ETH coins will gradually begin to decline.
However, a sharp rise in the ETH price is not at all guaranteed. For example, the news of the imminent activation of London did not provoke an increase in the cost of ether. The coin may continue to trade in a downtrend. If the value of the ETH does not go up, we are likely to face an outflow of miners – mining the coin on outdated equipment will become unprofitable – which will negatively affect the price. However, in the long term, Ethereum’s growth looks logical. Therefore, all losses of miners must be compensated.
Exactly how much Ethereum turns out to be deflationary will depend on the percentage of fees burned. The supply of coins will decrease if coins are burned faster than new ones appear. The specific ratio will be determined by the algorithm based on the situation in the network. It is also important to remember that the release of new ETH will decrease only when the network switches to staking.
According to Dune Analytics forecasts, activation of EIP-1559 will burn about a million coins per year – this is 1% of all ETH in circulation. ConsenSys predicts an annual Ethereum burn of 1.6 million coins. According to Coindesk forecasts, up to 4% of Ethereum can be burned in a year – the entire annual growth of the coin.
But specific indicators will depend on many variables, for example, the number of transactions and network congestion. In theory, the more transactions there are in the network, the more coins are burned.
The London hard fork will be one of the most significant updates to the Ethereum network and will affect how users interact with it. It will slightly reduce transaction costs and launch a deflationary mechanism – this may become one of the drivers of the coin’s growth by the end of the year.
But in the long term, the hard fork won’t have a significant impact on Ethereum. After all, next year the network will begin the transition to the PoS algorithm and will completely move to state 2.0 in a year and a half.
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