On Thursday, August 5th, the second-largest blockchain by market cap, Ethereum, underwent its 11th hard fork, dubbed “London.” This upgrade to the network contains five Ethereum Improvement Proposals (EIPs), each instigating changes in the network’s code which will supposedly optimize and improve the blockchain.
Of these five, EIP 1559 has been subject to the most scrutiny owing to its overhaul of the network’s much-discussed (and often lamented) fee structure, and other notable features which look set to alter the landscape, and the future, of the blockchain.
Fee Structure
Currently, users who transfer or transact on the Ethereum blockchain pay a “gas fee” for miners to process their transactions, with no prior knowledge of the exact price they’ll be paying until they’ve actually set in motion the transaction process, and the confirmation screen appears.
In order to make sure the transaction gets processed, some users may choose to pay higher gas fees to put themselves at the top of the pile and ensure their transfer goes ahead smoothly. Other users choose the opposite route, opting for a lower gas fee to minimize cost, which leads to uncertainty of whether the transaction will get processed in a timely fashion.
The EIP-1559 changes the method by which transactions are processed on the blockchain; it enables clear pricing through a base transaction fee structure which is paid to miners to validate the network transactions. Users may also choose to include an optional tip, or “priority fee,” alongside their base fee to incentivize miners to process their transfer more quickly.
This base fee will increase or decrease by up to 12.5%, depending on how much demand surpasses the ideal gas limit per block. Taking a look at how much the base fee is, Ethereum users will then have certainty over how much their transaction will cost, and of how congested the network is at any given moment.
These factors look set to lower the barriers to entry and access for the vast array of dApps built on the Ethereum network and should make the overall user journey and experience far more economical and efficient.
However, it’s important to note at this point that EIP-1559 does not aim to reduce transaction fees — only to make them more predictable. The base fee itself will vary, going up when the network is busier and down when things are calmer.
Token Burns
One of the most frequently cited arguments against Eth as a store of value is its unlimited token supply. Compare this to Bitcoin, which has a fixed and immutable token supply and distribution schedule that fuels an important part of its narrative with investors as “digital gold.”
While EIP 1559 does not introduce a bitcoin-esque supply cap on ETH, it does activate a mechanism to curb total supply growth over time by taking a variable amount of ETH out of circulation each time a transaction is executed.
Simulations of EIP 1559, conducted by Dune Analytics, suggest the activation of EIP 1559 over the 365 days prior to the analysis would have burned a total of 2,967,937 Eth, for a net reduction of 76% in ether supply growth over that period.
While this deflationary token mechanism is likely to result in price hikes, much like the Bitcoin halving, it’s important to note that this is far from guaranteed, as it depends on factors such as transaction volumes, which determine the volume of the base level gas fee, and therefore how much Eth is destroyed.
Looking Ahead
While the London Hard Fork does look set to revolutionize the Ethereum network and usher in a number of significant improvements and benefits for network users, there is also uncertainty about the scale and scope of this; and this uncertainty brings with it considerable risk.
Failure to deliver promised free-market efficiencies could result in user and developer disillusionment; if that occurs, Ethereum competitors such as Binance Smart Chain and Cardano will undoubtedly seize an opportunity to grab market share.
The eyes of the crypto community are all on Ethereum over the coming days, however, it will be the following weeks and months which determine the success of the London Hard Fork; whatever the outcome, one thing is for certain which is that this is an extremely exciting time to be active in the crypto markets!