Effects of EIP-1559 – What Did Ethereum’s London Hard Fork Do?

Ivan On Tech

Written by Ivan on Tech

August 18, 2021

The launch of the 11th hard fork upgrade in the run-up tp Ethereum 2.0 made headlines across global media outlets in recent months. With the introduction of the Ethereum Improvement Protocol (EIP) 1559, the underlying code to the blockchain adjusts the current rewards model for miners, outlining a controversial and radical update. Some Ethereum miners in the community were unsure about this, leaving questions around implementing the Ethereum London hard fork. The backward-incompatible update requires support and commitment from the majority of the network. But, what exactly does the Ethereum London hard fork do? And, what are the effects of EIP-1559?

In this article, we’re going to dive deep into the Ethereum London hard fork and explain the various Ethereum Improvement Proposals (EIPs) that it includes. Moreover, we’ll explore the differences between Ethereum and Ethereum 2.0. 

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Ethereum vs Ethereum 2.0 

As the second-largest blockchain, Ethereum is responsible for hosting over 80% of decentralized finance (DeFi) applications, according to DeFi Prime. But, what is the difference between Ethereum and Ethereum 2.0?

Blog Ethereum London Hard Fork 1

In 2015, Vitalik Buterin launched the Ethereum Network. Ethereum is the first blockchain to enable developers to design smart contracts to deploy decentralized applications (dApps). This was a revolutionary moment for programmers to create permissionless applications on a seemingly limitless decentralized landscape. The blockchain saw massive adoption and utilization of its innovative development tools. However, in some ways, Ethereum soon became the victim of its own success seeing substantial network congestion. 

Ethereum Gas Fees

Each transaction on the Ethereum Network is cryptographically and mathematically verifiable by computers in the network called nodes or miners. To achieve this, a certain amount of computational resources is needed to complete the transaction. Further, the miners receive ETH as rewards for their contribution to the network and incentivize honest behavior. To cover these expenses, Ethereum charges users gas fees

Blog Ethereum 2.0 Gas Fee

The unit of measurement for gas fees is called “Gwei”. Although there is often a suggested gas fee requirement, users have the freedom to set their own amount. The suggested gas fee is based on a supply and demand model. Gas varies depending upon the number of users making transactions on the network and the number of nodes available to validate said transactions. Naturally, miners in the network will choose transactions with higher gas fees first, as this means they will receive a larger fee as rewards. However, there is a mechanism in place to ensure that whales, or Ethereum users with substantial funds, can not continuously outbid the small fish in the network with transaction fees.

Ethereum miners have limited block space for the number of confirmed transactions. Transactions with larger gas fees take up more space in each block than transactions with smaller gas fees. Although with a higher transaction fee, the miner may receive a higher reward for that single transaction, it may be too high, taking up too much block space, becoming less economically viable for validating when calculating rewards of an entire block. As such, users are often suggested a gas fee amount, with a cheaper/slower option. There is often a more expensive but faster option too. However, these suggested amounts can fluctuate immensely depending on network usage. 

Ethereum 2.0

Readers who were in the crypto scene in 2017 may recall the CryptoKitties craze. At the time, it generated the highest network congestion the Ethereum blockchain had ever seen. Gas was at an all-time high, with the kitten breeding game taking up over 20% of the entire network computations. CryptoKitties made the headlines across several crypto media outlets by clogging the Ethereum blockchain. 

Blog CryptoKitties Network Congestion

Network congestion on Ethereum became increasingly prevalent with the “Summer of DeFi” in 2020. The crypto industry was witness to unprecedented adoption and uptick in development and users. However, with such an increase in demand yet little to no change in the supply of Ethereum miners and throughput, gas fees exceeded those in the peak of 2017. Scaling solutions were desperately needed.

Scaling solutions would increase throughput and therefore reduce congestion and transaction fees. Ethereum aims for a wider market beyond whales able to pay the high gas fees. However, it is worth noting, when exchanging with six or seven-figure transactions, $100-$200 in gas fees is arguably arbitrary compared to centralized, traditional banking alternatives.

Moreover, scaling solutions lower the barrier for entry for developers to deploy their own applications. Again, compared to traditional or centralized application development and deployment, the cost is already substantially lower. However, Ethereum aims to be financially viable for the everyday developer. 

The initial phase of the Ethereum 2.0 update was long-anticipated following continuous delays for over a year. Originally advised for a release in 2019, the first stage of Ethereum 2.0 was launched on December 1st, 2020. Ethereum 2.0 aims to reduce the network congestion issue, increasing scalability, while maximizing privacy and security. The remaining rollout of Ethereum 2.0 will happen in further phases

Beacon Chain: Proof-of-Work vs Proof-of-Stake

The first phase of Ethereum 2.0, or “Phase 0”, involves implementing the new Beacon Chain operating a Proof-of-Stake (PoS) consensus mechanism. Consensus models ensure that all nodes on the network can universally agree a transaction is valid before being placed in a block and appended to a blockchain. Until the rollout of Phase 0, Ethereum was solely operating on a Proof-of-Work (PoW) consensus algorithm. 

Proof-of-Work (PoW) is the first blockchain consensus algorithm. PoW requires large amounts of computational power to solve mathematical equations, validating transactions. Nodes in the network compete to solve the equation, with the winner receiving the transaction to place into their block. The advantages of PoW include its security and decentralization. However, security is dependent on the size of the network. Plus, it often requires expensive mining gear and copious amounts of electricity to partake. 

Blog Ethereum 2.0 Phases ft. Leslie the Rhino

Conversely, Proof-of-Stake (PoS) is a consensus mechanism that requires miners to stake ETH to become validators of the network. This drastically reduces the amount of energy required, making it a more eco-friendly consensus model. Also, PoS increases the network security, plus provides a greater incentive for miners. Miners must stake a minimum of 32 ETH. Any bad actors on the network will have their entire stake “slashed”. This provides a further incentive alongside rewards for honest participation. 

The Beacon Chain is the first stage of Ethereum transitioning to a full Proof-of-Stake (PoS) blockchain. During Phase 0, Phase 1, and 1.5, Ethereum will operate as both a PoW and PoS chain. However, by Phase 2, Ethereum will be solely PoS with the Beacon Chain operating as any other shard. Sharding is a layer-1 scaling solution partitioning the Ethereum blockchain into multiple chains to maximize throughput. Initially, Ethereum 2.0 will start with 64 shards, thus increasing throughput 64x.

Ethereum London Hard Fork

The Ethereum London hard fork is the 11th backward-incompatible update, following the previous Berlin hard fork. Often referred to as a “hard fork”, backward-incompatible upgrades require a majority cooperation from the network, operating together during the transition period. Without cooperation from the node communities, it leaves the vulnerability of a chain split resulting in significant challenges for Ethereum. 

Blog Ethereum 2.0 Hard Fork History

A miner using the Geth Ethereum software client accidentally approved a faulty transaction while testing the London hard fork on the Ropsten testnet, resulting in a chain split. Fortunately, this occurred during the testing stage so Ethereum developers could eradicate the bug prior to the launch of the main network. At block 12,965,000, approximately 12:34 pm UTC on August 4th, 2021, the Ethereum London hard fork upgrade went live on the mainnet. 

The Ethereum London hard fork implements five new Ethereum Improvement Proposals (EIPs) to optimize the user experience and improve the value propositions of Ethereum. The introduced code upgrades are EIP-1559, EIP-3554, EIP-3529, EIP-3198, and EIP-3541. In short, these proposals cover improvements in application development, use of the Ethereum Virtual Machine (EVM), gas refunds, and the “difficulty bomb”, a mechanism that determines the difficulty of solving the transaction equation. However, the most famed proposal is EIP-1559. The EIP-1559 proposal radically adjusts the gas fee, mining rewards, and the ETH token economics model.

EIP-1559

EIP-1559 includes four major adjustments to the Ethereum code. Firstly, EIP-1559 includes a token burning mechanism to counterbalance ETH’s increasing uncapped supply. Secondly, the improvement reduces gas fee volatility and increases the efficiency of the gas fee market. Finally, EIP-1559 aims to prevent economic abstraction of ETH, meaning users of the network will continue to pay gas fees in ETH instead of other platform-specific ERC-20 tokens

Blog Ethereum 2.0

Before EIP-1559, users set their own gas fee or choose the prompted amount when making a transaction. Following the implementation of the improvement protocol, gas fees will become automated through a bidding system. Gas fee amounts fluctuate depending on network congestion and will create a sense of predictability with transaction fees. The new fee market also changes the priority of transactions. 

Furthermore, EIP-1559 introduces a block size variance twice that of the previous size, increasing the number of transactions that can be placed in a block when the network congestion is high. This aids greater transaction throughput, thus the speed of transaction confirmation times. Also, this intends to improve the efficiency of the gas fee market. 

Another upgrade under EIP-1559 includes an adjustment to the miners’ rewards model. With EIP-1559, miners will receive fewer rewards from transaction fees, extracting more value from transaction “tips” from network users, block rewards, and possibly “maximal extractable value” (MEV). Moreover, an additional significant improvement involves the burning of a percentage of each transaction fee. This intends to reduce the supply of Ethereum, therefore increasing its value and potentially become a deflationary digital asset. 

Effects of EIP-1559

There has been a lot of controversy over the Ethereum London hard fork, particularly implementing EIP-1559. Primarily, this has come from miners with fear the change in the rewards model will reduce their income as rewards for participating and securing the network. Also, institutional spectators have questioned the reliability of the upgrade with such unrest within the mining community as to whether there would be a majority upgrade. However, implementation was successful for the Ethereum London hard fork launch.

Blog EIP-1559

Moreover, the token burning mechanism generated through EIP-1559 begs the question of whether ETH will become a deflationary asset. CoinShares’ chief strategy officer (CSO) Meltem Demirors told CNBC in an interview regarding the Ethereum upgrade: “the EIP-1559 proposal alone will not make Ether deflationary…because the nominal amount of gas burned won’t outpace network inflation”.

Co-author of EIP-1559 and co-founder of EthHub, Eric Conner, stated in the CNBC interview, “I think the most important thing that EIP-1559 shows to investors is that Ethereum is still an actively developed project which refuses to stagnate and become obsolete”. Also, Conner revealed he hoped the EIP-1559 proposal would make ETH a deflationary asset in the long term by reducing the supply.

Although EIP-1559 alone won’t considerably lower the cost of gas fees, the upgrade can improve the overall user experience (UX) on Ethereum. Moreover, EIP-1559 can bring added value to ETH. Since the implementation, the value of ETH has risen from around $2,818 to $3,263 at the time of writing, according to CoinGecko

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Ethereum Beyond DeFi

The necessity for Ethereum scaling solutions expands the industry of solely decentralized finance (DeFi). Even with the Ethereum London hard fork and Ethereum Improvement Proposal (EIP) 1559, during times of high network activity, the gas fees can be double figures for just a simple transaction. This can apply to data as well as financial transactions. 

Moreover, the Ethereum blockchain is of use to projects in the fashion, music, and supply chain management industries. In order for these projects to scale and increase adoption, Ethereum must achieve low-cost affordable gas fees for network interaction. Further, Ethereum now has a range of other competing smart contract-enabled blockchains that developers could choose to build on. Many blockchains offer lower costs for development and end-users too. 

However, Ethereum stands head-and-shoulders above the rest of smart contract-enabled blockchains in the industry. The Ethereum Network is community-centered, ensuring full privacy and security for users. These advantages are also attractive to enterprises looking at blockchain business solutions

As recently discussed by co-founder Vitalik Buterin in a conference at the Grand Amphi Theatre, Ethereum is the perfect host for non-fungible token (NFT)-based applications that can have use cases beyond decentralized finance (DeFi). This includes education, the healthcare industry, the insurance industry, or the energy sector. Moreover, Buterin expressed ideas for the Ethereum Name Service (ENS) to be used internet-wide. ENS usernames could be used as an alternative when entering sites that prompt users to sign in with their Facebook, Twitter, or Google accounts. In order to achieve this level of availability and adoption, though, continued scaling progress must occur.

Exploring Ethereum London Hard Fork & Effects of EIP-1559 Summary

The Ethereum London hard fork is a backward-incompatible update that successfully saw a majority of the Ethereum node community upgrade their software. In turn, this brought with it the five Ethereum Improvement Proposals (EIPs): EIP-1559, EIP-3554, EIP-3529, EIP-3198, and EIP-3541. Together, these protocol updates improve the Ethereum experience from streamlining development processes to implementing a new gas fee market. 

Blog Ethereum London hard Fork

Arguably the most controversial update to the blockchain was the change in the rewards model for the miners on the network. Also, the burning of ETH from transaction fees means theoretically, with enough network usage, ETH could become a deflationary asset. In summary, the hard fork has seen successful implementation with node cooperation. Ethereum is on track for the rollout of Ethereum 2.0, increasing availability to the masses and reducing the cost of interaction with the network. 

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