The much-anticipated and contentious “London” hard fork of Ethereum has just gone live.
The successful upgrade has been accompanied by a rise in the price of ether, the native token of the Ethereum network. The cryptocurrency is currently trading at $2,620, up 3.9 percent over the previous 24 hours.
A large portion of the excitement stems from the software upgrade resulting in a few significant — and required — modifications to the code that underpins the world’s second-largest cryptocurrency.
For ethereum users, things have always been difficult. The blockchain has always struggled with scaling, and its extremely unpredictable and occasionally excessive transaction costs can irritate even its most ardent supporters.
The problem has gotten worse in recent months as a result of a boom in interest in nonfungible tokens.
The code changes made on Thursday, which have nothing to do with London, are intended to address many of these difficulties by destroying or “burning” ether currencies and altering transaction fees to make them more predictable.
If ethereum were a highway, London would be building a few lanes to reduce traffic and standardize toll pricing.
Nick Carter, a general partner at Castle Island Ventures and a co-founder of Coin Metrics, stated, “It adds a lot of complexity to the fee rationale, but it’s an interesting technique that might potentially stabilize the fee dynamics.”
More predictable fees
Even though the ethereum blockchain undergoes frequent upgrades — this is hard fork #11 for those keeping track – analysts believe the “London” upgrade is a game-changer.
Five Ethereum Improvement Proposals make up the hard fork itself. For short, they’re called EIPs, and each one proposes a collection of code changes.
EIP-1559 is the one that everyone is talking about
Users would effectively participate in an open auction every block before the upgrade, where they would have to place a bid with a miner in a “first-price auction.” Due to the closed-bid setup, users were frequently taking a chance when proposing transaction fees (also known as “gas prices”), choose a quantity that they thought would ensure their inclusion in the following block of transactions.
Some users who felt the need to prioritize their transaction would offer to pay a higher price than their original bid to acquire preferred status within the block.
“Fifteen-fifty-nine is supposed to create an ecosystem that favors lower gas fees,” Auston Bunsen, co-founder, and CTO of QuikNode, a blockchain infrastructure provider for developers and businesses, stated.
“Sometimes people will pay a lot of money to get into a block. “Fifteen-fifty-nine aims to address this issue by establishing a flat fee,” Bunsen stated.
Rather than having a blind auction every block to establish the gas price, the Ethereum protocol will select the transaction cost algorithmically based on total network demand.
Having the procedure determine a standard gas price should minimize big price spikes, while this does not guarantee that customers will pay less. It’s just one giant hedge against the market going completely insane.
Having the procedure determine a standard gas price should minimize big price spikes. While this does not guarantee that customers will pay less. It’s just one giant hedge against the market going completely insane.
Users will still be able to skip the line by tipping after the modification.
However, EIP-1559 has sparked a larger change: the block size has doubled.
While this means each block can have twice as many transactions, in theory, ethereum developers have structured the update so that the protocol only needs the block to be half-filled. This will help level out demand spikes and keep gas prices consistent.
Bitwise Asset Management’s chief investment officer, Matt Hougan, compares the design rationale to that of a ferry boat.
If the ferry companies set the ticket price too low. They may need the excess seat capacity to accommodate passengers waiting on the dock. These passengers may wish to pay the base ticket price.
“However, the price ratchets up very quickly and algorithmically to the point where you should get to a clearing price that permits the block to be half-filled, and certainly that allows all of the transactions that want to go through to be processed,” Hougan stated.
The base fee is finally stabilized by making the block size dynamic to meet fluctuations in demand.
It sounds straightforward. But this is an elegant design solution to a problem that plagued ethereum since its birth. Explained Hougan.
The time bomb is ticking
The ether that would have gone to the miner would now be “burned.” This permanently destroys a chunk of the digital currency that would be recycled back into circulation.
Some argue that the EIP-1559 upgrade will put deflationary pressure on ethereum. This is because a decrease in supply might lead to a price increase. However, there exist some assumptions in this logic.
“It only causes deflationary pressure if burnt fees truly outnumber fresh issuance,” Carter explained. “This is only true during periods of high fee intensity.”
According to Carter, burning gas prices would not result in net deflation, at least not under the current charge structure. Burning those fees, however, will result in a significant change for miners, leaving them with only two cash streams.
Miners can still sell their processing power to the network. This is in the hopes of earning additional ether if they win a block. They can still get advice from other users who want to improve their position in the block.
However, miners will not make as much money in the immediate future as they did before the hard fork.
Because miners organically link to the total value of ethereum. According to Hougan, the aim is that if the price of ethereum rises as a result of these protocol improvements. They will eventually make up for their losses.
Experts told CNBC. The problem with this thinking is ethereum miners will soon become outdated in the next few years. A stipulation contained in Thursday’s improvements addresses this very mining Armageddon.
Ethereum Improvement Proposal-3554 is another EIP in the London fork.
But it doesn’t receive similar attention as EIP-1559. Its significance is crucial. This update in the code paves the way for ethereum 2.0, system upgrades. And redesign that has been in the works for years.
The network would move from the energy-intensive “proof-of-work” mining method, in which miners solve difficult math equations to create new coins, to “proof-of-stake,” in which users just use their existing ether cache to verify transactions and manufacture new tokens. This shift will have far-reaching implications not just for ethereum, but for the whole cryptocurrency industry.
EIP-3554 pushes back a key deadline for ethereum miners to upgrade their software to prepare for the switch, known as the “difficulty time bomb,” from summer 2022 to December this year.
The difficulty bomb’s goal is to drive miners and node operators to upgrade their software after a set length of time has passed, according to Carter.
Once activated, the proof-of-stake change would effectively make ethereum unmineable, according to Bunsen. In other words, once the protocol has fully moved to a proof-of-stake basis, the entire ethereum mining sector as it exists now will be irrelevant in a few years.
So, what draws you to London? The ethereum community has simply named its hard forks after cities where the Devcon international developer’s conference has taken place. Shanghai is up next.
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