Ethereum is releasing the “London” mainnet upgrade this week, which is the most significant update to Ethereum’s fundamental system in years.
Five Ethereum Improvement Proposals are included in the upgrade. Despite its uninspiring name, one of these, EIP-1559, has attracted a lot of attention in recent months. Why? Because it represents a significant change in the economics of Ether (ETH), the Ethereum network’s native cryptocurrency.
EIP-1559 has the potential to have far-reaching consequences for the Ethereum ecosystem as a whole. Its purpose is to reduce the amount of ETH in circulation at any given time, which could lead to higher prices if the quantity is demanded. It should also make transaction rates more predictable (or possibly cut them), which could benefit customers who have seen fees spike in recent months, making smaller or more frequent transactions impossible.
An overview of Ethereum’s history
Ethereum is the second-largest cryptocurrency in terms of market value. It isn’t only a type of digital money, though.
Ever since its inception in 2015, Ethereum has been the foundation for a wide range of applications, including decentralized finance (DeFi), stablecoins like USDC, and non-fungible tokens (NFTs).
Apart from its predecessor Bitcoin, which is primarily a digital currency, Ethereum is a highly adaptable platform for deploying smart-contract-based applications. Imagine a big global computer made up of thousands of different machines all over the world, each running a copy of the Ethereum software. This is one way to think about the Ethereum network.
In this case, the Ethereum software serves as the operating system, and it, like other operating systems on your phone or computer, receives updates from time to time. Some improvements are simple changes, while others provide important new features.
Unlike your phone, Ethereum is decentralized, which means there isn’t a single developer in charge of issuing updates. Changing the core Ethereum program, on the other hand, necessitates a “hard fork.”
When a majority of a cryptocurrency’s community (usually users, miners, developers, and investors) agrees to change the core rules regulating the program and underlying blockchain, this is known as a hard fork.
The London upgrade, which is due to go live this week and includes, among other things, EIP-1559, is one such change. It will go live between the 4th and 5th of August at Ethereum block 12,965,000.
So, what is the purpose of EIP-1559?
The Ethereum network has long relied on ETH digital money. When users perform a transaction, they pay “gas” costs in ETH. Miners have long been compensated in ETH, both in the form of gas fees paid by users and new ETH generated by the network, for their work validating transactions and updating the blockchain.
This system is changed by EIP-1559, which was proposed by Ethereum co-creator Vitalik Buterin in 2018. Users will pay a simplified fee (now referred to as a “base fee”), as well as a “tip” that can be added to speed up transactions.
The base fee, on the other hand, does not go to the miner who confirms the transaction. Instead, it’s “burned” by the network, which means it’s taken out of circulation for good. The following are some of the possible outcomes:
Prices for gasoline should be more predictable. Prior to EIP-1559, users were encouraged to spend more money on gas in order to win a “first-price auction” – since miners, predictably, validated higher-paying payments first.
Due to a decrease in circulating supply, ETH prices have the potential to grow. The supply of ETH will be reduced overall because a piece of it will be permanently removed from circulation — or “burned” — during each transaction. Prices may grow if demand remains constant. (There are also hazards involved with the update, the most serious of which is the chance of angry miners quitting or revolting, causing security and transaction times to suffer.) For more information, see the section below.)
This decrease in supply may eventually turn ETH into a deflationary asset, allowing it to mature into a “store of wealth” investment like Bitcoin.
This, according to some observers, will help with institutional adoption.
The upgrade has been successfully implemented on the Ethereum testnet, and simulations to predict potential supply deflation rates have commenced.
Was there any backlash from the Ethereum community?
Yes, and this is why the London improvement has taken so long to implement. Miners undertake a lot of the heavy lifting for the network, and some are worried that as a result of EIP-1559, their income may suffer.
This might result in a contentious fork, decreased miner activity, and perhaps two competing Ethereum chains (similar to what happened in 2016 when Ethereum Classic was created).
So, what’s next?
The London Mainnet is only one of Ethereum’s many anticipated improvements. Ethereum 2.0 (ETH2), a more significant shift, will completely decouple Ethereum from mining.