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Summary
- Five Ethereum improvement proposals (EIPs) have recently been brought up under the Hard Fork.
- “London hard fork” upgrade is anticipated to bring down the transaction costs.
- The long-term impact of the move may be a higher token price as well as more transparency around gas fees.
The world’s second largest cryptocurrency, Ethereum, may witness a price rise due to reasons such as Google greenlighting the US crypto ads, clearer regulations, and the Ethereum’s London upgrade. The London Hard Fork has succeeded the significant growth of Ethereum and may lead to its continued growth in the future.
But the major upgrade of the blockchain network, Ethereum 2.0 or Serenity, has stirred up a lot of controversy.
What is the London hard fork?
The Hard Fork comprises of a set of five Ethereum improvement proposals (EIP). These include the code upgrades EIPs 1559, 3554, 3529, 3198 and 3541, which focus on enhancing the user experience of the Ethereum network, its value proposition, and more. The investors have shown keen interest in the potential overall impact of the new EIPs on the entire Ethereum network, but the EIP-1559 or the London hard fork is receiving the maximum attention as compared to previous upgrades.
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The ultimate goal of EIP-1559 is to improve the predictability of Ethereum transaction fees for its users. It is trying to change the method used to calculate transaction fees, while reducing its volatility and making the transactions smoother. Before the upgrade came in, the users participated in open auctions, and bids were placed by network users against each other for their transactions to be processed by the miners, which was known as “first-price auction”. This meant that the there were fluctuations in the fees, based on how busy the network was. A busier network would mean a higher transaction fees, and excessively higher transaction fees annoyed even the biggest fans of the crypto market. Also, the transaction fees proposed by users in this closed-bid setting, also known as “gas prices”, was like getting stabbed in the dark as they had to choose a number hoping that it would guarantee their inclusion in the next block of transactions.
Other problems faced in the past few months include a rising interest in nonfungible tokens, as well as significantly high growth in the world of decentralized finance (DeFi), which are both majorly using the blockchain of Ethereum. The London upgrade will help in stabilising the fee dynamics and the overall Ethereum network.
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The upgrade will bring a change such that the users will have to pay a base transaction fee, which will be set algorithmically based on how busy or quite the network is. This fee will be known to users up front. The miners can also be tipped so that the transactions can be processed at a higher speed. The fact that the investors are so excited about is that the miners will just get the tip, and not the base fees, so it will be destroyed, or “burned”. Burning of coins could make them more valuable as their supply would be limited, which would increase the value of the existing coins in the system. Also, a part of miners’ income will be transferred to the token holders. This would eventually lead to the irrelevance of mining as making money in mining will become harder.
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Having a uniform gas price would decide as per the protocol might not necessarily be cheaper for buyers, but it should be able to prevent substantial spikes. Basically, it works like a big hedge against significantly disrupting market fluctuations. Theoretically, the EIP-1559 upgrade will also help in doubling of the block size, enabling twice the number of transactions per block as compared earlier, but practically the protocol is designed such that the box only remains half full, which can support the smoothening of spikes and stabilization of gas fees.
How will it affect the Ethereum price?
The actual impact of burning of ether can’t be assessed until the London hard fork is deployed. It is being anticipated that the move will expose the users to a to a cheaper as well as more flexible fee structure, along with bringing a deflationary impact on Ether due to a mild burn effect. The positive sentiment in the market due to this move has led to an upward trend in Ether price, shooting its price to over US $3,000. A further significant price impact on Ether might be witnessed next year, as its developers are aiming to entirely overhaul the Ether network.
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