The Ethereum London hard fork is an update that changes the transaction fee model and the difficulty time bomb of the blockchain. The Ethereum network will set transaction fees at a base fee per block instead of bidding on gas prices.
To coincide with the planned release of Ethereum 2.0, developers are also delaying an intentionally integrated event known as a difficulty time bomb. This will incentivize miners to switch from Proof of Work (PoW) to Proof of Stake (PoS).
The London hard fork of Ethereum is an update to the Ethereum blockchain, coming soon after the Berlin hard fork in April 2021. The London update makes significant changes to Ethereum’s transaction fee system, which has long been a subject of controversy. The update also prepares for the planned release of Ethereum 2.0 by making adjustments to its consensus model.
However, London is considered controversial by some due to the significant changes to cryptocurrency trading and mining fees. The exact effects the changes will have on users and miners are not fully known yet, but they will only be temporary as Ethereum 2.0 is coming soon.
What’s New in the Ethereum London Update?
Ethereum’s London Update is a hard fork introducing two new Ethereum Improvement Proposals (EIPs). With the release of Ethereum 2.0 (Serenity) slated for 2022, the London update prepares for the move to Proof of Stake. Miners will see the mining difficulty slow down to coincide with Serenity. Since London is a hard fork, all nodes must use the new rules and the latest version to continue mining and validating.
The most significant change will be transaction fees, including a new deflation mechanism. Previously, users entered auctions to pay their gas fees. Miners will prioritize transactions based on the added fee and use the fee as a reward for adding it to a block. Now, each block will have a fixed, associated fee for replacement. This change is a result of EIP-1559, which was included in the London update alongside EIP-3238.
What is EIP?
Ethereum Improvement Proposals (EIPs) are specifications that outline new features for the Ethereum blockchain. Developers create their proposals along with suggestions from the Ethereum community. Anyone can create an EIP and submit it for discussion before the community accepts the proposal.
Each EIP follows the principles outlined in EIP1:
The EIP shall provide a brief specification of the feature and the rationale for the feature. The EIP author is responsible for building consensus in the community and recording dissenting opinions.
An EIP author should follow a predetermined process before approving an EIP, involving peer review and manuscripts. Once the community is happy with the proposal, they can add it to the release.
What is EIP-1559?
EIP-1559 is understood to be a proposed change to the way users pay gas fees on the Ethereum network. This EIP was created by the founder of Ethereum, Vitalik Buterin and a group of other developers.
Over time, the average fees charged by Ethereum users have become too expensive for small transactions. For example, if the network fee is around $20 (USD), it is not worth it to send $20 worth of Ether (ETH) or another digital asset. Especially for starters, these high fees make the network less attractive.
EIP-1559 proposes a new transaction pricing mechanism that would instead generate a base fee per block. Blockchains will write fees, reducing the overall supply of Ether (ETH). This effect will create deflationary pressure on cryptocurrencies.
The base fees vary per block depending on network demand. If a block becomes more than 50% full with transactions, the base fee will increase and vice versa. This mechanism tries to keep a half-full balance for the majority of blocks.
You can also add a miner tip as an incentive to skip your transaction queue. However, Ethereum manages to keep blocks around 50% full even without a tip. With so much space available in each block, the tip most likely only needs to be small to get to the front of the queue.
What is EIP-3238?
Integration into Ethereum is a difficulty ticking time bomb that makes Ethereum mining more and more difficult. Once we reach the difficulty bomb, the time it takes to mine a new block will be so long that profits for miners will drop and transactions will be too slow. The developers want to make sure that miners have no choice but to stop mining Ethereum 1.0 and switch to Ethereum 2.0 upon release.
However, blockchain will reach this point too soon. To ensure the network incentivizes validators to Ethereum 2.0’s Proof of Stake consensus model at the right time, EIP-3238 will delay the ticking time bomb.
Without this, it is possible that miners continue to use Ethereum 1.0, similar to the split seen with Ethereum and Ethereum Classic. The delay of the time bomb will lead to a 30-second block time ice age around Q2 2022. By this time, the merging of Ethereum 1.0 with Ethereum 2.0 should be complete.
What does the community think?
There are mixed feelings when it comes to network upgrades in London, mainly in regards to transaction fees. Although miners are preparing to end Proof of Work with Ethereum 2.0, this update significantly changes the fee that miners receive. This reduction can lead to a decrease in the profits that the miners make. Besides, Ethereum mining may become more centralized is another concern. Some argue that only the largest miners with the lowest energy costs can operate profitably.
While we cannot say for sure, deflationary mechanisms are expected to increase the price of ETH. Such an expectation may be related to the fact that after the update, Ethereum will burn the ETH base fee of all blockchain transactions.
What does the London update mean?
Just like Bitcoin, the current mechanism works similarly to a bid. The more transaction fees (or gas costs) you pay, the more likely your transaction is to be picked up by miners quickly and validated. But after the London update, you won’t need to choose the gas price you pay when making Ethereum transactions.
Instead, you’ll only see the base fee, plus an option to tip the miner. However, the base fee can change between the time you send a transaction and when it is added to a block. To avoid this, you can set the fee limit to be the maximum you want to pay. If a miner includes your transaction in a block where the base fee is less than your fee limit, the network will refund the difference.
London will be one of the key updates we’ve seen on how users interact with Ethereum. Many of the previous updates changed a lot of the system that we don’t normally see when using Ethereum. Now, the possibility of trading price and time reduction is more likely, but still not guaranteed.
However, Ethereum 2.0’s PoS transition is scheduled for 2022, so the London hard fork implementation is still time-limited and temporary.