This article is provided by Exness.
2021 can only be described as an eventful year for Ethereum. The blockchain’s Berlin hard fork went live back in April, introducing lower gas prices and new transaction types. On the day the update was deployed, the price of Ether hit a new all-time high, rising above 2,500 USD for the first time in its history.
The Berlin upgrade not only addressed the main concerns raised by the Ethereum community but also acted as a stepping stone to the much-anticipated London hard fork.
Taking place tomorrow, the London upgrade is set to bring about momentous changes that pave the way for the network’s evolution to Ethereum 2.0. The anticipated improvements are driving speculation that the London fork will create a positive impact on the price of Ether.
Read on to find out everything you need to know about the upcoming Ethereum London hard fork.
1. EIP-1559: The Introduction of Base Fee
The London hard fork involves two new Ethereum Improvement Proposals (EIP), namely EIP-1559 and EIP-3238.
First proposed by Ethereum co-founder Vitalik Buterin in 2018, EIP-1559 aims to bring fundamental changes to the mechanism behind gas fee payments.
Currently, users pay their transaction fees through a bidding mechanism. Paying a higher gas price means miners are more likely to prioritise validating your transaction. However, the implementation of EIP-1559 will introduce a fixed base fee to every block according to its size.
Users will no longer have to decide how much gas fee they want to pay when making transactions. Yet, they can tip the miner by paying an optional inclusion fee.
The base fee for each block varies with network demand. It will increase as soon as a block becomes over 50% saturated with transactions. Similarly, the base fee will drop if transactions fill less than half of the block.
Ethereum will burn the base fee permanently. The supply of Ether will subsequently decrease tremendously, generating deflationary pressure on the cryptocurrency. There is widespread speculation that this will trigger an increase in Ether’s price.
EIP-1559 will also bring about an elastic block size on Ethereum that varies with network demand. The maximum gas limit per block will increase from the current 12.5 million to 25 million.
It is expected that EIP-1559 will solve the long-standing problem of Ethereum’s high transaction fees. As the blockchain has become increasingly congested, gas prices have skyrocketed and become too expensive for users to perform small transactions. This update will prevent that and could give Ethereum a boost in popularity as it becomes more affordable for both beginners and seasoned blockchain users.
2. EIP-3238: Difficulty Bomb Delay
EIP-3238 is being introduced to smooth the path for the Ethereum 2.0 upgrade. An important feature of Ethereum, the difficulty bomb makes Ethereum mining more challenging.
When the difficulty bomb is triggered, block times will become so long that mining will no longer be profitable. This contributes to a phenomenon known as the ‘Ethereum Ice Age,’ when miners have no choice but to stop mining the current blockchain and shift to the new one.
The difficulty bomb will force miners to switch from Ethereum 1.0 to Ethereum 2.0. But detonating the difficulty bomb too soon may result in miners continuing to use Ethereum 1.0. This would create a split similar to what happened with Ethereum and Ethereum Classic.
Delaying the difficulty bomb until Q2 2022, EIP-3238 ensures that miners will move from Proof-of-Work (PoW) mining to Ethereum 2.0’s Proof-of-Stake (PoS) system at the right time in a seamless transition. Or so the founders hope.
3. From Proof-of-Work to Proof-of-Stake: an Environmentally-Friendly Shift
Ethereum’s shift from Proof-of-Work to Proof-of-Stake is an attempt to reduce the blockchain’s carbon footprint.
Environmental impact has recently become a flashpoint for cryptocurrencies, as demonstrated by Tesla’s decision to suspend Bitcoin as a payment method due to its energy consumption. Ethereum prioritising sustainability is seen as a major positive next to its more environmentally destructive competitors.
In the current Proof-of-Work blockchain, miners are incentivized to invest in robust, fast hardware. The better a miner’s hardware, the more likely they are to create new blocks and be rewarded with free Ether.
Unsurprisingly, this powerful hardware consumes an enormous amount of electricity. It is estimated that Ethereum’s current PoW model consumes 44.49 TWh every year, which is the equivalent energy consumption of a medium-sized country.
Proof-of-Stake removes this need for energy-draining hardware, replacing it with its cryptocurrency, Ether.
To become a full validator under the PoS system, users are required to stake at least 32 Ether on the network. The size of the stake determines a user’s probability of being selected as the next validator: the higher the stake, the more likely a user is chosen to verify the next batch of transactions. Similar to the PoW model, validators who secure the latest transactions will receive free Ether as a reward.
Since computer power is no longer the key for validators to earn Ether under PoS, Ethereum 2.0 is significantly more energy-efficient than its predecessor. The blockchain’s energy usage is expected to drop by more than 99% after the switch from PoW to PoS is completed
4. The Controversy and Potential Problems
“Although this hard fork will generate a positive impact on Ether price, it is considered controversial by some. The major change in transaction costs could lead to a decrease in miners’ profit,” commented Maria Agustina Patti, Market Analyst at multi-asset broker, Exness.
The broker’s Trading Specialist, Christopher Tahir, further explained Patti’s view: “For miners, the impact will be quite substantial. If users decide not to tip miners in order to pay lower fees, miners will earn a lot less from transaction fees. This concern has grown substantially, and many miners have tried to reject this proposal.”
Whilst it is believed the London hard fork will solve the issues of network congestion and high transaction costs, Tahir has a different opinion: “In this case, we are assuming that there will be no crash, no rush, nothing. But when there is a crash or rush, I believe the problem of high transaction fees will persist, as people will tip miners more to get prioritised.”
As many predict a surge in Ether’s price following the London hard fork, it could be an ideal time to invest in CFDs on Ether. Several reputable brokers offer Ether, but Exness is perhaps one of the more reliable in terms of pricing and execution.
Disclaimer: The content of this article is sponsored and does not represent the opinions of LeapRate
