Ethereum London Upgrade: What’s all the fuss about?
On August 5, 2021, the Ethereum network implemented one of the most important upgrades in its 6-year history — the London Hard Fork. In blockchain language, a fork means splitting the network up into two parts to make changes. Until now, Ethereum has operated in a way that uses virtual ‘miners’ to run the network with their computers in exchange for a small payment. With the London Hard Fork, Ethereum now takes a vital step towards a new system that operates in a more environmentally friendly way.
Why the upgrade?
When Canadian computer scientist Vitalik Buterin first began designing the Ethereum blockchain back in 2013, cryptocurrencies were in their infancy. Back then, Bitcoin’s Proof-of-Work (PoW) method was the only known way to build and secure a blockchain, so as a result, Ethereum adopted the same model.
However, while PoW works well on paper, it presents significant problems when put into practice — specifically how big it can get. In order to continue running a PoW blockchain, more and more computing power must be added to the network as it grows, leading to negative environmental impacts. While Bitcoin has chosen to address these issues through the use of renewable energy sources, Ethereum will take another route: a Proof-of-Stake (PoS) consensus method.
- Proof-of-Work (PoW): Resource-intensive, uses lots of energy. Highly secure.
- Proof-of-Stake (PoS): Uses less energy but lacks the proven security of PoW.
At a virtual festival in Hong Kong earlier this year, Buterin noted how “Proof-of-stake is a solution to environmental issues and needs far less resources to maintain.” According to the Ethereum Foundation, the network’s energy usage could be reduced by as much as 99.95% . This would take it down to the equivalent energy used by a small town, rather than that of an entire country.
Another key advantage of the PoS method is the ability to increase transaction speeds by a magnitude of thousands using a method called sharding. There are already hundreds of applications operating on the Ethereum network, so it can no longer support the level of transactions in its current form.
Recently, these limitations have made app developers consider moving to other blockchains, so clearly there is an urgent need for a change. Ethereum has already begun the process of implementing sharding by splitting the blockchain into multiple sections that run in parallel.
The Benefits of Sharding:
- Users don’t need to download the entire blockchain.
- It can run thousands of more transactions than Bitcoin.
- Fast, low-cost micro-payments are possible.
The London Hard Fork and Ethereum 2.0
The most significant change in the London Hard Fork is EIP-1559, a proposal to change how transaction fees are processed. This is important because the old method often resulted in fees that were astronomically high.
Now, instead of users bidding with miners in a type of ‘fees auction’, a set base fee of Ether tokens (ETH) is added to every transaction and then burnt (removed from circulation) to reduce inflation. This is important because, unlike Bitcoin’s hard-coded supply limit of 21 million coins, ETH tokens have no set limit.
- Users pay lower fees/have a better idea of the cost.
- Fees are burnt, increasing scarcity and reducing inflation.
In the first week following the London hard fork upgrade, Ethereum burnt over 32000 ETH tokens worth an estimated $100 million. This means Ethereum is now a deflationary asset, which should help to increase its value in the long term.
The London Hard fork is just one element in the migration towards Ethereum 2.0, with previous steps including the launch of the Beacon Chain in December 2020. This forms the backbone of Ethereum 2.0, upon which all parallel chains will run and users can begin ‘staking’ their tokens on Ethereum to become validators.
Next year, a new virtual machine called the Ethereum Web Assembly (eWASM) will be implemented, massively increasing efficiency and making it possible for a new wave of coders to use the network. And that’s not all — Ethereum developers are constantly hard at work coming up with new ways to improve the network, with plans for Ethereum 3.0 already underway. Watch this space!