Ethereum’s ‘London’ Hardfork and Five Major Updates Explained
Ethereum’s London upgrade is slated to go live on the Ethereum mainnet on Thursday at block 12,965,000. The upgrade, which follows the Berlin hardfork that went live on April 15, consists of a set of five Ethereum Improvement Proposals (EIPs).
The upgrade has been broadly covered by media outlets, yet there are a number of misconceptions about its implications. The upgrade would not make Ethereum deflationary by default, and it would not substantially reduce Ethereum’s supply. So, what exactly does this upgrade do?
EIP-1559: London Hardfork’s Biggest Upgrade
In its essence, the London hardfork contains five Ethereum Improvement Proposals (EIPs), which include EIP-1559, EIP-3198, EIP-3529, EIP-3541, and EIP-3554. Each of these proposals addresses a distinct issue, altogether paving the way for the much-anticipated Ethereum 2.0 upgrade.
The most popular of these proposals, EIP-1559, aims to address Ethereum’s issue of a highly unpredictable transaction pricing mechanism. The original EIP, which was proposed back in 2019, summarizes EIP-1559 in this way:
“A transaction pricing mechanism that includes fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.”
To better appreciate what this upgrade will bring to the table, it is important to understand how the Ethereum fee mechanism currently works. As of now, Ethereum implements a “first-price auction” module to determine transaction fees, meaning the higher you bid, the sooner your order will be placed.
Think of a busy taxi stand, where there are only a limited number of cabs but a lot of consumers. While there is the option of waiting in line, one can also bid the highest he is willing to pay in order to complete the ride sooner. The drivers can see all the bids while consumers can’t find out what others are bidding.
This scenario perfectly describes the current fee mechanism of Ethereum. Considering that, at times, this module would result in underbidding or overbidding, it brings forth issues of inefficiency and uncertainty. EIP-1559 addresses these issues by improving fee predictability, introducing a base fee at each block.
The base fee is a required payment to be contained in a block which will be automatically determined in reference to the previous block. This would enable a preprogrammed fee bidding system that cannot increase or decrease by more than 12.5%. However, users can make their offer more attractive by adding a tip.
In addition, what makes EIP-1559 so popular is that the aforementioned base fee would not be paid to miners, rather it would be burned. Arguably, this will make Ethereum deflationary as some ETH will be removed forever. However, it is worth mentioning that only in times of high network congestion can Ethereum issuance turn negative.
A general misunderstanding regarding EIP-1559 is that it will decrease Ethereum’s gas fees. But high fees are problems of scalability, not inefficient fee mechanisms. Thus, what can really address the high fee issue is Ethereum’s 2.0 upgrade as a whole, or layer 2 solutions.
Other London Hardfork Upgrades Explained
While Ethereum’s 2.0 upgrade is a slow process, the London hardfork is an important step. While a number of smart contract platforms are emerging, Ethereum faithfuls anticipate 2.0 to cement the platform’s position as the leading smart contract platform.
Apart from EIP-1559, which is the biggest upgrade of the London hardfork, four other upgrades will also take place. These EIPs include:
EIP-3198: In simple terms, this upgrade will add an opcode, BASEFEE, that will extend user experience improvements to smart contracts. As Ethereum.org defines it, EIP-3198 “gives the Ethereum Virtual Machine (EVM) access to the block’s base fee”.
EIP-3529: This upgrade would aim to remove gas refunds for SELFDESTRUCT, a function that destroys a contract on the blockchain system. EIP-3529 would also reduce gas refunds for SSTORE.
The refunds were initially aimed to enable developers to transfer Ether when emergency situations arise. However, this function opened a vector of attack for hackers while also increasing state size with the invention of Gas Tokens.
Here is how Ethereum.org summarizes this upgrade:
“Remove gas refunds for SELFDESTRUCT, and reduce gas refunds for SSTORE to a lower level where the refunds are still substantial, but they are no longer high enough for current “exploits” of the refund mechanism to be viable.”
EIP-3541: This upgrade would disallow new contracts starting with the 0xEF byte to be implemented. Basically, this upgrade aims to pave the way for broader Ethereum Virtual Machine (EVM) improvements through identifying contracts that comply with EIP-3540 semantics.
EIP-3554: This proposal has a simple task: delaying the difficulty bomb, a mechanism that freezes mining as the network transitions from POW to POS, to December 1st since the proof of stake transition is not ready. More specifically, the upgrade postpones the difficulty bomb 9,700,000 blocks later.
How will the London hardfork affect the price of Ether? Let us know what you think in the comments below.