Ethereum just activated a major change called the ‘London hard fork’
Ethereum’s much-hyped and somewhat controversial “London” hard fork has just activated.
So far, news of the successful upgrade has coincided with a runup in the price of ether, the native token of ethereum’s blockchain. The cryptocurrency is at $2,620, up 3.9% in the last 24 hours.
A big part of the enthusiasm has to do with the fact that the software upgrade means a few big — and necessary — changes are coming to the code underpinning the world’s second-biggest cryptocurrency.
It has always been a tough go for ethereum users. The blockchain has a long-standing problem with scaling, and its highly unpredictable and sometimes exorbitant transaction fees can annoy even its biggest fans.
The problem has become worse in recent months thanks to a surge in interest in nonfungible tokens, which are mostly built on ethereum’s blockchain, as well as an explosive growth in the world of decentralized finance, or DeFi, which also largely uses the ethereum blockchain.
Thursday’s changes to the code, which has little to do with the city of London, are designed to fix many of these issues by destroying or “burning” ether coins and changing the way transaction fees work so that they are more predictable.
If you think of ethereum like a highway, London is adding a few lanes to tamp down traffic and is standardizing toll prices.
“It adds a lot of complexity to the fee logic, but it’s an interesting approach that could potentially stabilize the fee dynamics,” said Nic Carter, Castle Island Ventures general partner and Coin Metrics co-founder.
Making fees more predictable
Even though the ethereum blockchain gets makeovers all the time — for those keeping track, this marks hard fork #11 — the “London” upgrade is a game changer, according to experts.
The hard fork itself consists of five Ethereum Improvement Proposals. They are called EIPs for short, and each puts forth a set of changes to the code.
The one that everyone is latching onto is EIP-1559.
Before the upgrade, users would essentially participate in an open auction every block, where they would have to place a bid with a miner in something referred to as a “first-price auction.” The closed-bid setting meant that users were often taking a stab in the dark when proposing transaction fees (known as “gas prices”), picking a number that they felt would guarantee their inclusion in the next block of transactions.
Some users who felt the need to prioritize their transaction would offer to pay a premium above their bid to try to gain preferred status within the block itself.
“Fifteen-fifty-nine is really meant to create an ecosystem that encourages lower gas fees,” said Auston Bunsen, co-founder and CTO of QuikNode, which provides blockchain infrastructure to developers and companies.
“Sometimes people are willing to pay a lot to get into a block. Fifteen-fifty-nine seeks to remediate this issue by creating a base fee,” continued Bunsen.
Rather than holding a blind auction every block to determine the gas price, ethereum’s protocol will algorithmically decide the transaction fee based upon overall demand on the network.
Having the protocol decide a uniform gas price should prevent major spikes in prices, although that doesn’t necessarily mean it will be cheaper for buyers. It is, in essence, one big hedge against the market falling totally out of whack.
However, the upgrade will still allow for users to jump the queue by tipping.
But a bigger change fomented by EIP-1559 is a doubling of the block size.
While in theory, this means that twice the number of transactions can happen in each block, the upgrade has actually been designed so that the protocol only wants the block to be half full. This is meant to help smooth out spikes in demand, helping gas fees to stay stable.
Matt Hougan, Bitwise Asset Management’s chief investment officer, uses the metaphor of a ferry boat to explain the design logic.
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