In brief
The Ethereum London hard fork is an update that changes the transaction fee model and is a blockchain difficulty time bomb. The Ethereum network sets transaction fees at a base fee per block, rather than bidding on gas prices.
To coincide with the planned release of Ethereum 2.0, developers are also delaying an intentional built-in event known as the difficulty time bomb. This will encourage miners to switch from Proof of Work (PoW) to Proof of Stake (PoS).
Introduce
The London hard fork is an update to the Ethereum blockchain, coming after the Berlin hard fork in April 2021. The London update makes significant changes to Ethereum's transaction fee system, which has long been always a controversial topic. The update also prepares for the planned release of Ethereum 2.0, by making adjustments to its consensus model.
However, some have argued for the London hard folk version, because of the significant changes to cryptocurrency trading fees and mining operations it brings. The exact effects the changes will have on users and miners are not fully revealed, but they will be temporary as Ethereum 2.0 is coming soon.
What is the Ethereum London Hard Fork?
Ethereum's London Update is a hard fork that introduces two new Ethereum Improvement Proposals (EIPs). With the release of Ethereum 2.0 (Serenity) planned for 2022, the London update is set for a move to Proof of Stake. Miners will see a slowdown in mining difficulty coinciding with Serenity. Since London is a hard fork, all nodes must use the new rules and the latest version to continue mining and validation.
The most significant change will be transaction fees, including a new deflation mechanism. Previously, users had to participate in an auction to pay their gas fees. Miners will prioritize transactions based on the added fee and use the fee as a reward for adding it to a block. Now, instead, each block will have a fixed, associated fee. This change is a result of EIP-1559, which was included in the London update along with EIP-3238.
What is EIP?
Ethereum Improvement Proposals (EIPs) are specifications that outline new features for the Ethereum blockchain. Developers create their proposals along with taking suggestions from the Ethereum community. Anyone can create an EIP and submit it for discussion before the community accepts the proposal.
Each EIP follows the principles outlined in EIP1:
The EIP must provide a concise specification of the feature and the rationale for why the feature is included. The EIP author is responsible for creating community consensus and documenting dissenting opinions.
An EIP author needs to follow a set process before approving the EIP, including peer review and drafts. When the community is satisfied with the proposal, they can add it to the release.
What is EIP-1559?
EIP-1559 is a proposal to change the way users pay gas fees on the Ethereum network. This EIP was created by Ethereum founder Vitalik Buterin and a team of other developers.
Over time, the average fees paid by Ethereum users have become prohibitively expensive for small transactions. For example, if network fees are around $20 (USD), it doesn't make sense to send $20 worth of Ether (ETH) or another digital asset. These high fees make the network less attractive, especially for beginner users.
EIP-1559 proposes a new transaction pricing mechanism, which includes creating the concept of a per-block base fee. Blockchain will burn fees, reducing the overall supply of Ether (ETH). This effect will create deflationary pressure on cryptocurrencies.
The base fee varies with each block, depending on network demand. If a block is 50% filled with transactions, the base fee will increase and vice versa. The purpose of this mechanism is to try to keep a half-full balance for the majority of blocks.
You can also add a miner tip as an incentive to get your transaction prioritized in the queue. However, Ethereum tries to keep blocks about 50% full, even without tipping. With so much space available in each block, it only takes a small tip to get your transaction to the front of the queue.
What is EIP-3238?
Ethereum has a built-in difficulty time bomb, making it increasingly difficult to mine Ethereum. Once we hit the difficulty time bomb, the time to mine a new block will be so long that profits for miners will decrease and transactions will be too slow. The developers want to ensure that miners have no choice but to stop mining Ethereum 1.0 and switch to Ethereum 2.0 when it is released.
However, blockchain will reach this point too soon. To ensure the network incentivizes validators to use Ethereum 2.0's Proof of Stake consensus model at the right time, EIP-3238 delays the time bomb.
Without this, there is a possibility that miners continue to use Ethereum 1.0, similar to the Ethereum and Ethereum Classic split that occurred. Delaying the time bomb will lead to an ice age of 30-second block times around Q2 2022. By this time, the merger of Ethereum 1.0 with Ethereum 2.0 will be complete.
What does the community think?
There are mixed emotions when it comes to the London network upgrade, and this mainly concerns transaction fees. Even though miners are preparing to end Proof of Work with Ethereum 2.0, this update will still significantly change the fees miners receive. This cut could lead to a decrease in the profits generated by miners. Another concern is that Ethereum mining could become more centralized. Some people believe that only the largest miners with the lowest energy costs can operate profitably.
Although we cannot say for sure, deflationary mechanisms are expected to increase the price of ETH. Such an expectation may be related to the fact that after the update, Ethereum will burn the ETH base fees of all blockchain transactions.
What does the London update mean for users?
Similar to Bitcoin, Ethereum's current mechanism works similarly to an auction. The more transaction fees (or gas fees) you pay, the faster your transaction will be picked up and validated by miners. But after the London update, you will no longer need to choose the gas price you pay when making Ethereum transactions.
Instead, you'll just see the base fee, plus an optional miner tip. However, the base fee can change between the time you send a transaction and when it is added to a block. To avoid this, you can set a fee cap that is the maximum you want to pay. If a miner adds your transaction in a block where the base fee is less than your fee limit, the network will refund the difference.
summary
The London hard fork is one of the important updates that affects the way users interact with Ethereum. Previous updates have also brought many unprecedented changes to the Ethereum network. As predicted, the possibility of reducing transaction prices and saving time on Ethereum will most likely happen, but everything remains in the future.
However, Ethereum 2.0's transition to PoS is scheduled for 2022, so the hard fork implementation in London will take place in due course.