On Wednesday, August 4th, the Ethereum network expects to undergo a “hard fork.” Dubbed the London hard fork, this upgrade represents the next step in the path to Ethereum 2.0. If you’re not sure what Ethereum 2.0 is check out our recent post that covers the basics.
What’s a Fork?
In the world of cryptocurrency, a fork occurs when developers make a significant change to the rules of a blockchain network. Picture yourself walking along a path that splits into two directions (a fork). The path to the right is just like the one you’ve been walking along.
The path to the left has a series of steps rising into the distance. The steps change the way you move along the path, but they’ll also help you climb to higher peaks.
Ethereum’s London fork includes five different kinds of “steps”, all of which should strengthen the network. These improvements are referred to as Ethereum Improvement Proposals or EIPs. The specifics of London’s five EIPs can get a little complicated. So let’s just discuss one a few of them. We will first break down EIP 1559, that’s slated to bring about the biggest change, then break down EIP 3198, EIP 3541, and EIP 3529, which work as extensions of EIP 1559.
EIP 1559: Miners, Gas, and Burning Crypto
Ethereum has no limits on the number of coins (ETH) that can exist. This is one of the main criticisms of Ethereum as compared to Bitcoin, which will never have more than 21 million coins (BTC). And those criticisms are entirely valid. The basics of supply and demand suggest that increasing the supply of anything will lower its value.
EIP 1559 doesn’t impose a limit on the number of coins that can be created. Instead, it forces the network to regularly ‘burn’ coins as a way of limiting the supply. To do so, it changes the incentives for Ethereum miners to confirm transactions.
Quick refresher: whenever you use the Ethereum network, like when you buy ETH online, you pay a small transaction fee. These “gas fees” go directly to Ethereum miners. The miners earn these fees by solving complicated equations with powerful computers. This process confirms (finalizes) transactions, ensuring that the person who sold you the ETH can’t take it back.
When EIP 1559 goes into effect, you’ll still need to pay gas fees. But instead of paying miners, the network will “burn” the fee, permanently removing a tiny fraction of a coin from circulation with every transaction. After the fork, miners will receive compensation in a different way.
New coins will still be minted regularly. So rather than decreasing the total supply of ETH, the new process will simply slow the rate of growth. If EIP 1559 was implemented a year ago, it would have burned nearly 3 million coins by now. During that same time period, more than 3.5 million coins were minted.
Here is a brief breakdown of a couple more Ethereum Improvement Proposals:
EIP 3198
This EIP configures the smart contracts to implement similar benefits to EIP 1559. According to Decrypt, “With EIP-3198, transactions that utilize smart contracts shouldn’t be overpaying on fees.”
EIP 3541
According to Decrypt, “[EIP 3541] mostly sets the table for future updates, reserving some space within the network to create new types of smart contracts.”
EIP 3529
This EIP’s purpose and design is to make the network more stable by reducing and removing “gas” refunds.
All in all, you probably won’t notice any difference when Ethereum’s London fork goes into effect. But the changes set up ETH for long-term success. The fork is one of the many steps planned to help bring Ethereum to new heights.
