Abstract

The Ethereum London hard fork upgrade changed the blockchain’s transaction fee model and difficulty time bomb. The Ethereum network will set a base rate for transaction fees per block, replacing the gas price bidding model.

In order to cooperate with the scheduled release of Ethereum 2.0, the developers also intentionally postponed a built-in event called the "Difficulty Time Bomb". This will encourage miners to switch from Proof of Work (PoW) to Proof of Stake (PoS).

Introduction

Following the Berlin hard fork in April 2021 Later, the Ethereum blockchain once again realized the Ethereum London hard fork upgrade. The London upgrade brings significant changes to Ethereum’s transaction fee system, which has been controversial before. In addition, this upgrade also adjusts the consensus model of Ethereum to prepare for the scheduled release of Ethereum 2.0.

However, the London upgrade has also been criticized by some due to its significant impact on cryptocurrency transaction fees and mining. The exact impact these changes will have on users and miners is not fully known yet, but since Ethereum 2.0 is about to launch, these impacts will not last long.

What is new in the Ethereum London upgrade?

The Ethereum London Upgrade is a hard fork that introduces two new Ethereum Improvement Proposals (EIPs). With Ethereum 2.0 (the "quiet" phase) scheduled for release in 2022, the London upgrade provides some preparation for the move to proof-of-stake. In order to prepare for the "quiet" phase, miners will find that the rate of increase in mining difficulty will slow down. This London upgrade is a hard fork, and all nodes must use the new rules and the latest version to continue mining and verification.

The most significant change is transaction fees, which include a new deflation mechanism. Previously, users paid for fuel through bidding. Miners prioritize transactions by fee and pocket the fee as a reward for adding the transaction to the block. Today, each block only involves an associated fixed fee. This is a change brought about by EIP-1559 and EIP-3238 in the London upgrade.

What is an Ethereum Improvement Proposal (EIP)?

Ethereum Improvement Proposals (EIPs) are technical specifications that outline various new features for the Ethereum blockchain. Developers take suggestions from the Ethereum community and create individual proposals. Anyone can propose an EIP and submit it to the community for discussion, after which the community decides whether to accept the proposal.

Each EIP must follow the guidelines set out in EIP1:

The EIP should describe concise technical specifications and rationale for the functionality. EIP writers are responsible for building consensus mechanisms within the community and recording different voices.

They must follow a set process and go through stages such as peer review and drafting before the EIP can be approved. After receiving community approval, the proposal will be included in the release plan and await online release.

What is EIP-1559?

EIP-1559 is a proposal to change the way users pay for gas on the Ethereum network. The EIP was jointly created by a development team composed of Ethereum founder Vitalik Buterin and other developers.

Over time, the average fees paid by Ethereum users for small transactions became too high. For example, it's not cost-effective to send $20 worth of ether (ETH) or other digital assets if the network transaction fees are around $20. The high handling fees greatly reduce the attractiveness of the network and deter beginners.

EIP-1559 proposes a new transaction pricing mechanism, which will set a basic fee for each block. The blockchain will destroy this fee, reducing the total supply of Ethereum (ETH). This will ultimately lead to a significant increase in deflationary pressure on cryptocurrencies.

The base fee for each block will vary based on network demand. If a transaction occupies more than 50% of the block, the base fee will increase, and vice versa. This mechanism allows most blocks to strive to maintain an equilibrium state of half full.

Users can also pay miners tips as an incentive to skip transaction queues. However, Ethereum attempts to keep blocks half-full without tipping. There's plenty of space left in each block, so just a small tip can get your transaction to the front of the queue.

What is EIP-3238?

Ethereum has a built-in difficulty time bomb that continuously increases the difficulty of Ethereum mining. After encountering the difficulty time bomb, the time for mining new blocks will become very long, resulting in a decrease in miners' profitability and seriously slowing down the processing speed of transactions. After Ethereum 2.0 comes online, developers want to ensure that miners stop mining Ethereum 1.0 and fully switch to Ethereum 2.0.

However, it is still too early for blockchain to reach this level. To ensure that the network incentivizes validators to switch to Ethereum 2.0’s proof-of-stake consensus model at the right time, EIP-3238 will delay the time bomb.

Otherwise, miners may continue to use Ethereum 1.0, creating a split situation similar to Ethereum and Ethereum Classic. Once the time bomb is pushed back, there will be a 30-second ice age in block times around Q2 2022. At this time, the merger of Ethereum 1.0 and Ethereum 2.0 should be completed.

What does the community think about this?

There are actually some disputes about the London network upgrade, especially when it comes to transaction fees. While miners are preparing to say goodbye to proof-of-work with Ethereum 2.0 coming soon, the upgrade will bring significant changes to the fees they can earn. This reduction in fees is likely to lead to a decline in miners’ earnings. There is also a worrying issue, that is, Ethereum mining may become more centralized. Some believe that only the miners with the largest operations and the lowest energy costs can remain profitable.

While we cannot say for sure, it is expected that the deflationary mechanism will increase the price of Ethereum. This prediction may be due to the fact that after the upgrade, Ethereum will destroy the Ethereum base rate for all blockchain transactions.

What does the London upgrade mean to users?

Similar to Bitcoin, the existing mechanism also belongs to the bidding model. The more a user pays in transaction fees (or gas costs), the more likely their transactions are to be quickly picked up and verified by miners. But after the London upgrade, users no longer have to choose the gas price they pay when making Ethereum transactions.

Users only need to refer to the Basic Fee and choose whether to tip the miners. However, the base fee will also be different when a transaction is submitted and officially added to the block. In order to avoid this situation, users can set the maximum payment amount as needed, that is, fee cap. If a miner adds their transaction to a block and the base fee is lower than the set fee cap, the network will refund the difference to the user.

Summary

In terms of how users interact with Ethereum , London’s upgrade is of great significance. Previous upgrades have changed multiple system mechanisms that we don’t usually see when using Ethereum. Today, the transaction price and number of transactions are most likely to be lower, but the jury is still out.

In any case, the PoS transition plan for Ethereum 2.0 will be completed in 2022, so the London hard fork upgrade is still only a temporary adjustment with a time limit.