What Is the Ethereum London Hard Fork?

Foreword

Ethereum is the second-largest cryptocurrency in the world in terms of market capitalization, accumulating about 125 billion at the time of writing. It was the first cryptocurrency to create smart contract structures in the blockchain, enabling technologies such as DeFi, dApps and NFTs.

In August of 2021, the crypto went through what the community called its most important update as of yet, the London Hard Fork - which changed significant portions of the Ethereum network as the project prepares for its next update Merge.

In this article, we explain what the London Hard Fork is, what the changes of the update were and the impact on investors at the time of its release.

What is a fork?

An example of various Bitcoin forks in 2017 and their outcomes.

Source: Binary Options

Cryptocurrencies, in their majority, are complex decentralized systems that work with open-source codes. Therefore, they are subject to undergoing some modifications in order to optimize them, correct any bugs or even restructure the currency, make it more competitive in the market and ease the experience for users.

Forks are exactly a category of these updates that a decentralized crypto framework undergoes. Most major projects are subject to a fork at least once in their lifetime, to improve efficiency. There are two types of forks, ‘soft forks’ and ‘hard forks’. The former is more subtle and provides light changes to the current network, not having to paralyze it for the update to happen These are changes that occur in the background and often investors do not even realize they have been made.

Hard forks are more significant, intense and complex changes. Most of the time the hard forks that coins undergo become major events where a network is split into the former version and a new one, awaited by the crypto community and investors as they bring fundamental changes to the project and that can have major impacts on crypto. A great recent example of that is the Ethereum London Hard Fork, which was executed in early August of last year.

What is the Ethereum London Hard Fork?

Following the London Hard Fork, ETH experienced a significant upside in value while investors kept staking the asset into the protocol.

Source: CoinGape/Santiment

The Ethereum London Hard Fork was an update of the Ethereum blockchain, which took place at block 12,965,000. Such an update brought significant changes to the Ethereum network, related to the network’s gas fees for transactions and the emergence of a deflationary structure to the ETH assets. The name ‘London’ is simply a term, like the upcoming ‘Merge’, to simplify the adoption of two proposals - EIP 1559 and EIP 3238, which were added in this update.

What is EIP 1559?

EIP 1559 was an improvement suggestion made by Ethereum creator Vitalik Buterin and his team of developers. The main purpose of this EIP was to change the way users pay Ethereum trading fees, also called gas fees.

EIP 1559 created a new way of pricing transactions that take place on the Ethereum network, with a base rate of fees for each block instead of constantly varying prices. In this way, the crypto’s blockchain will consume the fee, resulting in a reduction in the total supply of ETH tokens. Such a shift finally created deflationary pressure on the cryptocurrency, something that investors were eager for since ETH doesn’t have a limited supply.

The idea is that the base rate changes according to the demand of each block. If a block is over 50% filled with transactions, the base rate increases, and if the block goes below 50%, the rate decreases. This mechanism aims to maintain a balanced level of 50% of the blocks’ capacity.

If the investor wants to prioritize their transaction, it is now possible to pay ‘tips’ to miners, as an incentive for this prioritization. Despite this possibility, the system will always try to keep the capacity of the blocks at 50%, with or without tips.

What is EIP 3238?

There is a mechanism called the ‘difficulty time bomb’, which is built into the Ethereum network. It is this mechanism that makes mining Ether cryptos increasingly difficult, and once we reach the limit of this time bomb, the time taken to mine each block will be substantial, implying a drop in miners’ profitability and very slow transactions. The developers of Ethereum want to ensure that miners have no choice but to stop mining on Ethereum 1.0 entirely and then move on to the updated network after the Merge - when Ethereum will fully become a Proof of Stake network rather than a Proof of Work one.

However, as it stands with current difficulty rates, the Ethereum blockchain would reach such difficulty ticking time bomb even before the launch of Ethereum 2.0. In this way, EIP 3238 is a solution to try to delay the difficulty threshold and encourage validators to use the Merge consensus protocol long enough for the update to occur. Since this is one of the major changes coming up soon, the network needed to ensure that this merger takes place successfully with every miner up to par on the matter.

Despite the implementation of EIP 3238 into the network following the Ethereum London Hard Fork, the process has not been received with consensus from all the miners. The Merge update, despite the success in its tests, continues to be delayed and is now expected for Q3 or Q4 2022 if everything goes according to the current plans.

From a financial standpoint, the Ethereum London Hard Fork was extremely relevant for investors as it provided far more legroom for how users want to use and pay for network transactions - consequently increasing the number of active wallets in the Ethereum network, which is still facing consistent growth since. Secondly, it paved the way for Ether to become a truly deflationary asset, with more and more ETH being burned everyday due to the new transactional structure. Both functionalities, combined, translate to far more users appreciating the network while each ETH also appreciates in value when its supply decreases.

Conclusion

The Ethereum London Hard Fork was one of the most important updates for the network, providing new and cheaper ways for users to interact with the already-hefty ethereum gas fees while also conceiving a new framework for ETH to finally become a deflationary asset. There are a series of exciting challenges on the way for the blockchain, like the upcoming Merge update and the end of the difficulty time bomb as Ethereum moves to a Proof of Stake structure. Regardless, the London Hard Fork played a key role in really taking Ethereum to the next level - every day closer to the years-long envisioned Ethereum 2.0.