Ethereum’s Hard Fork and What it Means for the Market
The Ethereum blockchain is gearing up for a hard fork. Around October 14th, 2018, the Constantinople hardfork is set to hit Ethereum’s testnet “ropsten”, and if all is well, the hard fork will occur on the Ethereum mainnet within the next three months.
The Ethereum Network is currently in the first stage of their third milestone — Metropolis v. Byzantium. The upcoming Constantinople hard fork is the second stage of Metropolis.
Constantinople will be the first version of Ethereum to introduce a Proof-of-Stake consensus system. Although a majority of the transactions on Ethereum will remain Proof-of-Work, every 100th transaction in Constantinople will use Proof-of-Stake consensus; this will help ease the transition to Serenity, Ethereum’s final milestone that is entirely Proof-of-Stake.
Within the Constantinople hard fork, five Ethereum Improvement Proposals (EIP’s) will be implemented. Most of these EIP’s will tweak technical aspects of the Ethereum blockchain to optimize efficiency and lower total gas costs. A majority of these upgrades most likely won’t be recognized by the layman, but one proposal in particular — EIP 1234 — will significantly affect the network and be felt by developers, cryptocurrency miners, and laymen alike.
Why the Hard fork?
If the Ethereum blockchain does not undergo a hard fork in the near future, the mining difficulty on the network will increase to the point that block verification times will be so slow, that activity on the network will come close to a standstill; this problem is better known as the Ethereum Difficulty Bomb or the Ethereum Ice-Age.
So one of the main reasons to hard fork the Ethereum network is to delay the Ice-Age; Constantinople, more specifically, EIP 1234, delays the ice-age by another 12 months. Additionally, there will be four more Ethereum Improvement Proposals implemented into the network in the Constantinople hard fork; EIP 1283, EIP 145, EIP 1014, and EIP 1052.
Most of these changes have to do with the operational efficiency and cost of op-codes on the Ethereum Virtual Machine, and most likely won’t be recognizable to the layman.
The EIPS and What They Do
Ethereum Improve Proposals 145, 1283, and 1052 make the Ethereum Virtual Machine — the engine that executes smart contracts — more efficient and lowers the cost of running smart contracts on Ethereum.
EIP 145 implements Bitwise shifting, which speeds up the arithmetic on the network and lowers the gas cost of transactions — this will make it cheaper to run certain smart contracts on Ethereum.
EIP 1052 increases the efficiency regarding the computing time of contracts, instead of checking the bytecode of a contract, EIP 1052 will make it so that only the hash — or the digital fingerprint — of the contract is checked.
EIP 1283 adjusts gas metering for SStore opcodes, as a result, there should be friendlier pricing for storage change caches.
EIP 1014 introduces state channels to the Ethereum network. Similar to the Lightning network on Bitcoin, state channels will allow transactions to happen off of the main chain and should incubate scaling solutions.
And finally,
EIP 1234, the Ethereum improvement proposal that will most likely have effects on the entire network, whether a user is a developer, miner, or speculator, they will most likely feel the effects of EIP 1234 in some way, shape, or form. EIP 1234 delays the Ethereum ice-age by 12 months and lowers the block reward from 3 ETH to 2 ETH. Out of the five EIP’s being implemented in the Constantinople hard fork, EIP 1234 is probably the most significant — a change in the block reward from 3 ETH to 2 ETH is huge.
What EIP 1234 Could Mean for the Market
A decreased block reward means that miners will be expanding the same amount of processing power and using the same amount of electricity to power their mining rigs, yet, earning a lesser supply of the reward in return. In theory, a decreased supply — ceteris paribus — should increase the value of the underlying asset. If the same amount of resources are working towards unearthing a smaller amount of something, that smaller amount should become more valuable to make up for the decreased supply. In the case of miners, they have electricity bills to pay, so to balance out the lesser reward they will be receiving from mining blocks, it would not be surprising if the cost of each Ether increased to compensate the decline in block reward.
As you can see in the graph, when demand stays constant, and the quantity supplied decreases, price increases.
But of course, that is considering all is well and that all other variables remain equal. The cryptocurrency market — like any market — is unpredictable, and any piece of information that has not yet been released or absorbed into the market price could change the future outlook. That is why it is important to always do your own research before making an investment!
Feel free to reach out to WhitePark Capital Team — for more information on the blockchain industry and cryptocurrency markets.
And be sure to check back on our blog for more updates regarding the cryptocurrency industry, and to be on the lookout for when the Constantinople hard fork finishes up on the testnet and goes live on the Ethereum mainnet!
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