What Is The 'London Hard Fork,' And What Does It Mean For Ethereum's Future?
Cryptocurrencies have been at the forefront of just about all media outlets over the last few years, especially those in the top 10. After Bitcoin, Ethereum is the second favorite in this realm and perhaps the most influential of them all.
Despite being the world's second-largest cryptocurrency, one of the cryptocurrency's Achilles heels is its high gas fees, making ordinary transfers quite expensive. Moreover, Ethereum has struggled dramatically with scalability because of the network congestion where the network only processes a handful of transactions.
Investors in ETH should be glad to know Ethereum has made one big step in addressing this problem by introducing an upgrade dubbed the 'London hard fork' that came into effect on 5 August 2021.
Such news has sparked considerable attention for long-time enthusiasts curious about what effect the upgrade will bring. The hard fork has arguably received more public curiosity than other upgrades in recent history.
As expected, Ethereum's value on the announcement day rose above $2800 for the first time in two months. It is currently trading at roughly $2935 per ETH at the time of writing. What does this all mean for the future of Ethereum and its participants? Let's discover more.
What is the 'London hard fork'?
So, what is the London hard fork? In the simplest terms possible, the London hard fork replaces the previous auction-style fee structure (which was often unpredictable) with a system setting less volatile gas prices or transaction fees. So, the upgrade will change the way transaction costs are calculated to make them smoother.
As with all hard forks, this one is not backwards compatible, meaning node operators would need to download Ethereum with the London upgrade if they wished to continue using the network.
It seems this fork was named after London probably because of the habit for the community to name such forks after cities that have hosted the Devcon international developer conferences.
The London hard fork is part of the Ethereum Improvement Proposals or EIPs, more specifically EIP 1559. EIPs are code upgrades to be rolled out over time, with numbers 3554, 3529, 3198, and 3541 as the major ones still in the pipeline.
Such proposals aim to improve the overall user experience and are all necessary as the cryptocurrency slowly transitions to its much anticipated Ethereum 2.0.
How will the fork affect Ethereum transactions?
It's beneficial first to understand how transactions took place on Ethereum before and how they will work going forward. One of the issues with cryptocurrencies like Ethereum is the transactions fees are dynamic and don't follow a fixed structure.
When the network becomes busy, as is often the case, it becomes expensive to send ETH-based tokens due to the increased demand. For calculating fees, Ethereum uses 'gas,' a unit of measurement referring to the computational power needed to deliver all operations on the blockchain.
The cryptocurrency has historically relied on a 'first price auction' mechanism for setting gas fees where every user set a gas limit to how much they are willing to pay per transaction.
Miners responsible for adding blocks with their nodes or computers would prioritize the transactions with the highest gas fees for obvious financial incentive reasons. Such a system lacks transparency and causes a ripple effect where senders set even higher bids, which is one of the reasons ETH transfers have been pricey over the last few years.
So, EIP 1559 will see the blockchain automatically determine the gas fee depending on the overall demand rather than through an auction system. Users who still prefer to have their transactions confirmed sooner can still pay a premium for this.
What's the big deal with the London hard fork?
Despite being a positive for users, it has been seen somewhat negatively for miners. Experts who have chimed in on the subject perceive the fork as potentially making mining obsolete in the near future.
This realization does coincide with Ethereum's much-anticipated plan of Ethereum 2.0, which will move it from the proof-of-work to proof-of-stake. The latter does not depend on the often criticized, energy-intensive proof-of-work consensus mechanism which has been considered as environmentally unfriendly.
Although mining is still relevant currently, it will become irrelevant down the line should Ethereum eventually move towards proof-of-stake.
How will the fork affect Ethereum presently?
The upgrade will affect the cryptocurrency presently in a few ways, namely the rewards of miners, backwards incompatibility, and the burning mechanism.
For the former, it means miners won't make as much revenue as they previously did because the gas fees will be more consistent. Yet, there is still a tiny hope to earn from users that would pay higher gas costs, along with the ability to sell their computational power and profiting from the potential long-term value increase of the coin.
Regarding backwards incompatibility, this refers to how each node or computer will need to upgrade its code simultaneously. A failure for this process to occur efficiently would interfere with the block production and, more significantly, possibly cause an actual chain split.
Lastly, the burning mechanism is another critical factor worth observing in EIP 1559, where a portion of ETH will be burned, potentially making it less inflationary.
As with any considerable upgrade, the London hard fork comes with uncharted territory. Although it's certainly beneficial for users in making gas fees more consistent, it will influence miners' earnings.
Still, the change was inevitable because Ethereum has long been trying to be highly scalable. If we consider that Ethereum 2.0 would see the coin moving to proof-of-stake, mining will likely become outdated.
Nonetheless, this news is mostly positive and adds to the bullish outlook of Ethereum overall.
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