It’s no secret that the Ethereum blockchain is currently undergoing a significant change as it looks to transition into the proof of stake (PoS) model. The upgrade started years ago, and it is expected to be completed sometime next year.
One of the most significant parts of the transition into ETH 2.0 was the London upgrade. It was successfully implemented earlier this month, and it has already driven significant gains in the price of Ether. So, what is it, and what are its implications?
What is the London Hard Fork?
The London hard fork contains five Ethereum Improvement Proposals (EIPs). This is where you find the critical details of the hard fork and what it looks to achieve.
One of the most significant differences between Ethereum and Bitcoin is that the latter has a fixed cap - there can only ever be 21 million BTC tokens ever created. On the other hand, Ether is inflationary. There is no upper limit to the number of ETH tokens that can be created, and miners are rewarded with new coins whenever they validate a block of ETH transactions - a process that happens about every 15 seconds.
The first EIP in the London hard fork - known as EIP-1559 - aims to make Ether more deflationary. If enacted, the EIP will remove all income from transaction fees that miners get. Instead, these incomes will go straight to the Ethereum network and get burned. The point is to reduce the number of ETH tokens that are available, essentially giving the asset a boost.
Of course, there are benefits to this EIP. One is that transaction fees will be more predictable for those using the Ethereum blockchain. Many users have complained about the congestion on the Ethereum blockchain, especially with the increased popularity of decentralized finance (DeFi) protocols and non-fungible tokens (NFTs). EIP-1559 will help to reduce that.
But, some miners have also complained about the EIP as it will cause them to lose a huge source of income.
Some miners have remained on the neutral point for now. Users will still be able to pay tips in order to increase the chances of their transactions being handled more quickly. But, the efforts to keep Ether deflationary should mean that the remaining ETH that will be distributed to miners as a reward will be worth even more.
What Makes EIP-1559 So Controversial
The dynamic for miners is actually quite interesting. They remain critical to the functionality of the Ethereum ecosystem, with their ability to maintain the blockchain’s operations and validate transactions. But, the transition to PoS might render them obsolete. Essentially, the move will make the transition to validators - people who now are interested in keeping the blockchain secure and functional.
Miners can easily serve as validators, but many of them already have expensive equipment that will now serve no purpose when the shift to ETH 2.0 is complete. If a miner hasn’t covered up the costs of the equipment they bought, they could end up losing a lot of money.
For now, the major question for EIP-1559 is whether miners will start to quit. It’s highly unlikely that there will be a mass miner exodus from the Ethereum network. But, a high number of departures could mean that Ether mining could become even more profitable for the miners who remain.
EIP-3554 and Other Coming Upgrades
Another notable EIP in the London hard fork is EIP-3554. It addresses the “difficulty time bomb” - a huge threat to Ethereum miners.
The difficulty time bomb is a feature in the Ethereum blockchain that will make it incredibly difficult to find new ETH. The point is to make it impractical to mine and reduce people's financial incentive to mine the asset. The time bomb was expected to launch earlier this month, but EIP-3554 will push it back to December 2021. This will give miners a little more time to prepare.
To be fair, the other EIPs in the London hard fork aren’t so important. But, other upgrades are still imminent in the move to ETH 2.0. So, there will still be a lot to look out for on this journey.
For now, the next huge milestone is the “merge” - an upgrade that will enable the Ethereum mainnet to dock with the Beacon Chain. This will make it possible to stake Ether across the entire Ethereum network. ETH 2.0 researchers have already been working on ways to make the process come faster. So, there is a possibility that the “merge” will happen even sooner than expected.
The “merge” will be followed by shard chains, which will expand the capacity of the Ethereum blockchain to store data and process transactions.