The changes the London Hard Fork bring to Ethereum Blockchain

[TL; DR]

• Ethereum launched the long-awaited London Hard Fork on 5 August 2022.
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• EIP-1559 regularizes the ethereum transaction fee by introducing a base fee and tips.
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• Burning of ETH will make ETH a deflationary token as it reduces its circulating supply.
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• The London Hard Fork sets a stage for future upgrading of the protocol including the Merge.

Introduction

Ethereum, the second largest cryptocurrency after bitcoin, has been facing several challenges which forced its community to design changes to the protocol through Ethereum Improvement Proposals (IEPs). In total, there are 5 EIPs namely EIP-1559, EIP-3198, EIP-3529, EIP-3541 and EIP-3554. Ethereum launched the London Hard Fork on 5 August. This hard fork will bring changes with far reaching consequences including normalizing the calculation of the transaction fee and paving the way for the implementation of the Merge, scheduled for later this year.

What is the London Hard Fork?

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A hard fork is a series of changes which the ethereum community proposed to bring permanent change to the rules and technology of the Ethereum protocol. The miners, the developers and the investors are the key stakeholders who proposed the changes to the ethereum blockchain. The reason for the name London Hard Fork is that the developers and other stakeholders held the conference which passed the proposed changes in London, a city in the United Kingdom. Now, let’s look at each of these EIPs and the changes they bring to the ethereum blockchain.

EIP-1559

EIP-1559 brings several critical changes to the functioning of the ethereum blockchain and its value creation. Probably, the best way EIP 1559 brings value to ethereum users is the rationalization of transaction fees.

EIP-1559 brings change to the calculation of the transaction fees

Before the launch of the London Hard Fork the ethereum blockchain used an auction-like process of setting transaction fees. Usually, the users almost guessed the right amount of gas fees for the transactions. The main problem was that the transaction fee would change within a short period. If the gas fee increased the transaction would get stuck for a long time up to several weeks. On the other hand, the users would overpay the transaction fee if the level of activity on the network decreases.


EIP-1559 eliminates both problems as there is a base fee all the users have to pay depending on the level of activity on the blockchain. This base fee is the minimum gas fee the users pay to transfer ETH or mint non-fungible tokens. The ethereum network will automatically set the gas fee depending on the level of activities on the blockchain. This is possible because the system allows the blocks to expand up to two times the current capacity during periods of high network activity.

If the block expands the transaction fee will increase by 12.5% per each block. On the other hand, if the blockchain activity decreases the gas fee will fall by 12.5% per every block until it’s close to zero. This system helps the users to better estimate the transaction fee. However, the users can choose to pay an extra amount through tips in order to incentivize the miners to give priority to their transactions. The amount raised through the tips goes straight to the miners.

The Deflationary Mechanism

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EIP-1559 has brought another dimension to the ethereum dynamics, controlling the circulating supply of ETH. As we know, ETH has an infinite supply which causes inflation. EIP-1559 creates a mechanism to control the supply of ETH through burning the ETH raised through transaction fees. Previously, the transaction fee was channeled to the miners as additional reward. However, the ethereum network automatically burns all the ETH raised through the base transaction fee, thereby reducing the quantity of ETH in supply. This has a deflationary effect on ETH which should help to increase its value.


Before ethereum launched the hard fork the ETH inflation rate was 4.2%. Analysts predict that after the launch of EIP-1559 the inflation will decrease to about 3.8%.

Clearing the misconceptions about EIP-1559

One misconception some people have is that the London Hard Fork will increase ethereum scalability.The truth is that this development does not increase the blockchain’s scalability.

Second, some people think that the launch of the hard fork will reduce the gas fee. The change is not designed to reduce the gas fee. This is because if the ethereum network is congested the transaction fee will remain high.

EIP-3554 and the difficulty bomb

EIP-3554 is a proposal that pushed back the difficulty bomb to December 2021. This is because if the difficulty bomb blows up it will make the mining of ethereum very difficulty. In other words, it makes it very difficult for the miners to validate transactions using the proof-of-work algorithm. The aim of EIP-3554 is to create room for the launch of the Merge where the ethereum network will shift from the proof-of-work consensus mechanism to the proof-of-stake one. Basically, the difficulty bomb increases the amount of time validators need to validate transactions, thereby reducing their rewards. Therefore, pushing back the difficulty bomb to December 2021 allows the miners time to shift from the proof-of-work system of validating transactions to the proof-of-stake one.


EIP-3529 and gas refunding mechanism

Before the London Hard fork upgrade there was a mechanism allowing miners to remove the smart contracts and the data they did not want. By doing that the system rewarded them with a gas refund. However, the miners ended up abusing the system by filling the network with junk data whenever the transaction fee was low.They would then claim their gas fee refund once the transaction charge increased. Therefore, EIP-3529 stops the miners from exploiting the mechanism and filling the network with worthless data.EIP-3198This enables the users to return the opcode thereby making it easier for the developers to call and use the base fee for decentralized application efficiency and estimations. In other words the base fee is transferred to smart contract powered transactions.

EIP 3541 and future upgrades

The work of EIP 3541 is to remove the system’s ability to create new contracts starting with “0xEF or Executable Format.” This restricts the Ethereum Virtual Machine (EVM) from using certain types of data. Thus, it makes the ethereum blockchain receptive to further changes in the future.

Conclusion

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Ethereum launched the London Hard Fork on 5 August. This created changes with long term impact on the capability of the blockchain. The key Ethereum Improvement Proposal is EIP-1559 which introduced stability in the network transaction fee as well as enabling burning of ETH to reduce its circulating supply. A decrease in the supply of ETH is expected to increase its value. The aim of EIP-3554 is to push back the difficulty bomb to December 2021 giving miners the chance to shift from the proof-of-work consensus mechanism to the proof-of-stake one.



Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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