Did the London Upgrade Save the Day? (Effect of London hard Fork on Investors, Users, and Miners)
On August 5, 2021, the London Hard Fork upgrade was implemented on the Ethereum network. This upgrade consisted of a set of five Ethereum Improvement Proposals. Especially the EIP-1559 was a subject of discussions because of its anticipated impact on the Ethereum network, its native cryptocurrency, investors, and miners.
With the Ethereum hard fork upgrade came a new fee system which ultimately improved users’ experience.
Before the upgrade, Ethereum transaction fees ran on bids; users on the network bid higher to avoid their transactions getting stuck in the queue. The base fee system introduced in the EIP-1159 is predetermined for any transaction. Although, base fees could change relative to the traffic on the network.
What Is an EIP?
The EIP stands for the Ethereum Improvement Proposal. The Ethereum blockchain has a document that describes its standards. It covers the protocol specifications, the standards of contracts, and client APIs.
Any member of the Ethereum network can submit an EIP to propose a change. While there are various improvement proposals for the ETH network, the famous EIP-1559 in the London upgrade is a significant move to prepare to merge Ethereum 2.0 and the mainnet.
EIP-1559
Before the London upgrade, Ethereum’s transaction fees were auction-based, where users competed to have miners process their transactions first. When you add Ethereum’s low transaction throughput to the equation, Ethereum’s popularity resulted in often unbearable fees.
With the EIP-1559 proposal, algorithms are now responsible for calculating base fee instead of relying on users’ bidding wars. However, the base fee also depends on network traffic. Further, users can give extra tips if they want their transactions to be processed faster. Another crucial aspect of the EIP-1559 proposal is its fractional fees burn mechanism that can possibly turn Ethereum into deflationary asset.
Market reacted positively to the London fork by 15% rally in just 3 days. However, some might argue that the bullish sentiment from the successful upgrade to the Ethereum blockchain was already partially factored in prior to the fork itself.
Preparing the Ethereum London Hard Fork for Launch
The London EIPs were being tested on a multi-client Ethereum test network named "Calaveras" as of May 2021. In June, developers were expected to activate London on larger, higher-traffic Ethereum test networks such as Ropsten, Goerli, and Rinkeby.
In July, Ethereum client teams released completed versions of the network's improved code. Subsequently, the community switched to newer versions of clients compliant with the forked chain.
The Aftermath - London Hard Fork
Miners that have upgraded to the latest client software upon London's activation on the Ethereum network immediately began creating blocks under Ethereum's new fee market dynamics. Others who had not upgraded continued to mine the Ethereum blockchain's earlier version.
The activation of any hard fork causes the network to split, with some miners and users running the legacy client software. Since Ethereum’s introduction in 2015, it has experienced ten ETH forks.
How did the London hard fork upgrade impact investors and the entire Ethereum network? Let's find out!
Effect of the Upgrade on Investors
After successfully launching a functioning smart contract platform, Ethereum revolutionized blockchain technology, bringing many novel use cases on chain.
The London upgrade was just another step on the way to scale up the Ethereum network to the point where it can seamlessly support wide range of decentralized applications.
Tokenomics-wise, Ether’s uncapped coin supply has been often a target of critism. Unlike Bitcoin, Ethereum has no predetermined limited supplys. While EIP-1559 does not impose a supply cap on Ether similar to Bitcoin, it defies the critics by activating a mechanism to limit overall supply growth over time by burning a variable amount of Ether from circulation each time a blockchain transaction is completed.
Further, EIP 1559 aims to bolster the narrative by making Ethereum transaction fees more predictable for users and DApps.
Considering the growing competition from other blockchain networks, the 1559 proposal included in the London upgrade intends to cement Ethereum’s leading position in a race to become a go-to platform for DApps worldwide.
The Downside - London Hard Fork
However, it’s not all roses - there are also disadvantages to London hard fork upgrade. With EIP-1559 activated, miners see less rewards for their efforts, potentially causing a risk to the network safety.
Thefore, disgruntled miners could leave the network. Block times and network security could suffer if many Ethereum miners leave or revolt.
What This Means for Ethereum Miners
With rewards from transactions on the Ethereum network significantly reduced, miners lost a chunk of an income source. With that said, Ethereum blockchain network’s hashrate has been growing steadily after London upgrade regardless of the fee structure change.
Another income source that fluctuates with user activity on the Ethereum network, similar to transaction fees, is the miner extractable value (MEV). MEV is the reward miners get after organizing transactions within a block.
MEV has been a lucrative business for miners thanks to the increased activity across the Ethereum DEXs. It’s been especially popular with frontrunning bots trying to artibtrage on-chain trades. Frontrunners pay up for their transactions to be executed prior to the targeted trades, hence resulting in instant risk-less profit.
What This Means for Ethereum Users
While the London hard fork did not really fix the high ETH fees incurred by network users, it improved their predictability. It’s important to note that future improvements coming after the Merge will tackle high fees, making the network poised for a mass adoption.
Meanwhile, EIP-1559 will be known as the Ethereum hard fork that affected users and DApp programmers by enhancing transparency in how fees are determined.
Upon the upgrade, excess money that is not used to pay for the base charge and inclusion fee is refunded to clients' accounts, preventing them from overpaying for blockchain transactions.
The high fees are due to the fact that it’s notoriously difficult to build a network that is simultaneously decentralized, scalable, and private. Hence, the reality of the Ethereum network's expansion, in terms of both active users and market value, made the fees skyrocket. Developers are currently working on ways to provide the Ethereum 2.0 with long-term scalability and flexibility by using cutting-edge technologies such as sharding and roll-ups.
Ending Thoughts
The Ethereum blockchain has experienced a series of hard forks over the years, of which the Berlin hard fork and London hard fork were implemented in 2021. The London ETH fork came along with certain proposals that have improved the economics of the Ethereum network.
Although the EIP-1559 upgrade reduced network volatility, it did not reduce transaction costs - it only made them more predictable. A big move towards Ethereum 2.0 is underway, an upgrade aimed at improving the network efficiency and the speed of transactions.
Ethereum users must also note that the increase in network congestion could still lead to higher transaction fees. Despite these challenges, Ethereum continues to be the most popular blockchain for Dapps and is expected to keep growing at rapid pace.
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