Containing numerous Ethereum Improvement Proposals (EIP), including the vital 1559 and 3554, it’s worth exploring what are the key features of the upcoming London hard fork and in addition – how it could change the Ethereum network.
Although it was initially scheduled to take place in July, a more recent statement from an Ethereum developer asserted that the London hard fork will occur on August 4th, 2021.
Why Does the Ethereum Blockchain Need Improvement?
Launched in 2015, the Ethereum network’s utilization has grown massively in the next six years as it’s arguably the most used blockchain in the space today. It has become the home for multiple stablecoins, countless NFT and DeFi projects, and, last but not least, its native digital asset, which happens to be the second-largest cryptocurrency by market cap.
With this utilization, though, came significant hurdles for the current proof of work consensus algorithm. Those included delayed transactions and unreasonably high fees reaching four digits in USD on some extreme occasions.
The developers working on the ETH blockchain saw this, and their ultimate solution is to transition the network from PoW to proof of stake. However, it’s a complex procedure requiring years of developing, testing and implementing before it’s completed.
Until then, they haven’t abandoned the PoW network and proposed several hard forks that could improve its performance faster.
Istanbul, Berlin and then London
After the Istanbul and Berlin hard forks, now it’s time for the next one with a code name London (named after the second annual developers’ conference in 2015).
Initially scheduled to take place in July 2021, its progress was going well as it had launched on several testnets, with the latest one being Ropsten.
However, it was delayed, and Ethereum developer Tim Beiko announced earlier this week that it’s expected to take place on August 4th between 13:00 UTC and 17:00 UTC at block number 12,965,000.
The London hard fork will contain several EIPs, most notable of which are 1559 and 3554. As explained in EIP-1, each proposal should follow these guidelines:
“The EIP should provide a concise technical specification of the feature and a rationale for the feature. The EIP author is responsible for building consensus within the community and documenting dissenting opinions.”
EIP-1559 aims to reduce transaction fees through a somewhat controversial method. Instead of the user having to send a gas fee to a miner for the transaction to be included in a block, EIP-1559 proposes that gas fees to be sent to the network.
Essentially, this new pricing mechanism will burn the fee, which will reduce the overall supply of Ether (ETH). The base fee will change with each block. It will depend on the network congestion, as if one block is 50% or more full with transactions, the fees will increase, and vice-versa.
EIP-3238, on the other hand, will target the difficulty time bomb. It’s a feature that makes mining Ethereum increasingly more difficult. The idea is for mining to become so hard that miners will have no choice but to transition out of Ethereum 1.0 and move over to Ethereum 2.0.
ETH difficulty long-term chart. source: Etherscan
At the current difficulty, though, the network would reach this too soon. Initial plans indicated that EIP-3238 would delay the so-called time bomb until the second quarter of 2022. However, the more recently proposed EIP-3554, whose review period ends on July 14th, would postpone the difficulty bomb “to show effect the first week of December 2021.”
The developers explained the motivation behind EIP-3554 as follows:
“Targeting for the Shanghai upgrade and/or the Merge to occur before December 2021. Either the bomb can be readjusted at that time or removed altogether.”
While the aforementioned proposed upgrades might sound like a move in the right direction for most, not all parties are happy, especially with EIP-1559. The burning of the fees would essentially create a deflationary effect on the second-largest cryptocurrency. Although this could enhance ETH’s chances to become a preferred store of value asset due to the lower supply, it would reduce miners’ profits.
And, Ethereum mining has indeed been a lucrative business, with profits surging to new highs in the past year or so. After the London hard fork, this could change, even though users will have the option to “tip” the miners if they choose to.
Somewhat expectedly, many mining companies opposed the implementation of EIP-1559. Others argued that even though EIP-2656 – which lowers gas costs of transactions using modular exponentiation (ModExp) – should enhance the network’s security and practically, there would be some potential issues on that front.
Additionally, a recent report by CoinMetrics asserted that EIP-1559 might not help with reducing the gas fees at all. It indicated that the high transaction costs are “fundamentally a scalability problem,” and as long as dApp usage keeps increasing, which is the current trend, they will remain at these levels.
Instead, the paper outlined another possible solution, at least until Ethereum 2.0 arrives. It comes from Layer-2 scaling networks as several blockchain projects have already launched such products.
In any case, the London hard fork is among the most anticipated events in the cryptocurrency space this year and will most likely have a significant impact on Ethereum’s highly utilized blockchain.