The highly anticipated Ethereum’s London Hardfork Upgrade is finally live! The update, which brings about some major changes to Ethereum, was activated at 12:33 pm UTC on Thursday, August 5. Before being activated on the mainnet, the update had gone live on various Ethereum testnets between June 24 and July 7.
For a long time, Ethereum, the second-largest blockchain in the world, has faced issues with scaling and is often highly unpredictable. To add to this, the high gas fees is a major deterrent to users. The growing popularity of NFTs, as well as DeFi in recent months, has further exacerbated these issues. The latest upgrade, hence, is designed to resolve most of these issues. Ultimately, the aim is to make the Ethereum network more scalable, secure, and sustainable.
The news of the upgrade, meanwhile, has sent Ether prices soaring. Soon after the upgrade, the price went up 3.9% to reach $2,620, reported CNBC. At the time of writing, Ether’s price had hit $3,166, up 6.54% in the last 24 hours.
Ethereum’s London Hardfork explained
While the London Hardfork brings forth five Ethereum Improvement Proposal (EIP) upgrades, the most important among them is EIP-1559. Also known as “ETH token burning mechanism”, EIP-1559 plans to make transaction fees less volatile and introduce a burning mechanism.
To perform a transaction on Ethereum, users have to pay gas fees. Before the upgrade, users paid this fee in every block through an open auction system. Here, users had to take the best guess at gas prices and place a bid with miners. However, this meant that some users would place a higher bid so that miners would prioritize their transactions.
As opposed, EIP-1559 aims to fix this issue by introducing a base fee. Here, Ethereum’s protocol will automatically decide a uniform gas fee based on network activity, thus eliminating the blind auction process. Nonetheless, the upgrade will still allow users to speed up their transactions by paying a tip or “priority fee” along with the base fee.
“It [the upgrade] reforms Ethereum’s fee market mechanism, and is a key change in this network upgrade,” Daniel Finlay, Lead Developer on MetaMask, told The Economic Times. “One of the main benefits of this update is more transparency around gas fees. Wallets will have better gas fee estimates, which makes transaction fees more predictable.”
Problems with EIP-1559
A major change that EIP-1559 brings forth is the burning of transaction fees. As opposed to Bitcoin, Ethereum has an unlimited token supply. EIP-1559 aims to reduce this overall supply by taking a certain amount of Ether out of circulation (a.k.a burning) during every transaction.
What does this mean for ETH prices? Reducing ETH supply will create a “deflationary pressure” on the network. Over time, as the overall ETH supply falls, the prices will go up. This will, however, depend on various factors like the transaction volumes, and gas fee, among others.
One of the biggest criticism surrounding the London Hardfork upgrade is this burning of fees, which will change the payout to miners. With the activation of EIP-1559, the base fee that users pay for transactions will be “burned”, instead of going to the miners. This, some believe, will reduce miners’ revenue by as much as 50%. As a result, there are chances that aggrieved miners may leave the network.
Moreover, according to a CoinDesk report, if the upgrade fails to deliver on “fee-market efficiencies”, disappointed users may move to other networks. Ethereum’s competitors like Binance Smart Chain is bound to use the opportunity to get ahead in the rat race.
What does all this mean for the NFT industry?
For long, artists and creators minting NFTs have borne the brunt of high transaction fees. While several blockchains have emerged to support NFTs, a majority of the NFT projects still continue to be built on the Ethereum blockchain. As activity on the network increases, so does the gas fees. For aspiring buyers and creators, this means losing a part of their profits.
The current Ethereum update focuses on making gas fees more predictable, meaning, NFT collectors and sellers have a chance to efficiently predict the gas fees before they make a transaction. Moreover, the London Fork will eventually lead to Ethereum 2.0, which will adopt a proof of stake (PoS) model instead of the current proof of work (PoW) system. This will ultimately bring down the gas fees as well.
“The cost will probably go down to about one-tenth of the current fees,” Anuj Kumar Kodam, Founder of Wall.app, told Mint. Wall.app is an NFT platform based in India.
Moreover, the PoS model will also allow users to mint NFTs in a more sustainable way. The blockchain’s developers believe that Ethereum 2.0 will reduce carbon emissions caused by Ether mining by 99%.
Ethereum Co-founders speak about the upgrade
Ethereum Co-founder Vitalik Buterin noted that after the London upgrade, he is “more confident” about the Ethereum network’s next phase of development. Buterin was referring to the Ethereum mainnet and the Ethereum 2.0 beacon chain merger.
Ethereum 2.0 is the much-awaited upgrade to Ethereum. The upgrade will not only improve the network’s security and scalability but also make it less energy-intensive.
Buterin told Bloomberg that the London hardfork is “proof that the ethereum ecosystem is able to make significant changes.” While the merge is expected to take place in early 2022, it could even come in late 2021.
Meanwhile, Ethereum Co-founder Joseph Lubin stated that the London upgrade takes Ether one step closer to becoming “ultrasound money”. He added that the upgrade is part of a larger “global movement”, which begins with “democratizing the Earth”.
Ultrasound money refers to a meme in the Ethereum community, which mocks Bitcoin holders. As Bitcoin’s supply is capped, it is often described as “sound money”.
While Ethereum’s London Hardfork upgrade brings forth much-needed improvements, some uncertainties still loom. Nevertheless, crypto and NFT enthusiasts have their eyes glued to the upgrade, and can see its full impact in the near future. Post this comes the Ethereum 1.0 and 2.0 merger, followed by Layer 2 scalability solutions. All in all, it is a highly exciting time for the crypto and NFT industry!