- The London Hardfork does not solve Ethereum’s high fee issues, rather it makes its fee mechanism more efficient.
- The upgrade also doesn’t make Ethereum deflationary by default.
- EIP-1559 would burn a portion of transaction fees called a base fee.
Ethereum’s ‘London’ Hardfork has been activated. The upgrade, which includes five Ethereum Improvement Proposals (EIPs), is a major step towards the long-awaited Ethereum 2.0 update.
While the London Hardfork has been widely covered by crypto media outlets, still there are numerous misconceptions regarding its implications. For one, the upgrade alone won’t make Ethereum a deflationary asset. Further, the upgrade wouldn’t also solve Ethereum’s scalability problem.
What Does Ethereum’s ‘London’ Hardfork Do?
Essentially, the London Hardfork consists of five EIPs, including EIP-1559, EIP-3198, EIP-3529, EIP-3541, and EIP-3554. The biggest of these proposals, EIP-1559, is potentially the most promising as it aims to make Ethereum’s fee mechanism more efficient while adding an element of deflation to the second-largest cryptocurrency by market cap.
Currently, the problem with Ethereum’s fee mechanism is that it is not very predictable. Ethereum utilizes a “first-price auction” system to define transaction fees. This method allows users to bid the highest they are willing to pay in order to get their transactions processed faster.
Since there are not any specific limitations for how high or low one can bid, the module creates issues of inefficiency. Thus, at times, users would end up overbidding or underbidding. EIP-1559 intends to tackle this issue by introducing a base fee.
The base fee would be an essential part of each transaction and would be determined algorithmically in accordance with the previous block. Consequently, the bids would not be up or down by more than 12.5% in comparison to the latest gas fee paid. However, the update adds the possibility of adding a tip to further incentivize miners.
Nevertheless, the above-mentioned base fee would not be paid to miners, instead, it would be burned. This is probably the most favorable part of this whole update, as, for the first time, an element of deflation would be added to Ethereum. However, it is worth mentioning that this would not turn the issuance of Ethereum negative by default — rather it would just slow down the process.
Another major misconception regarding the London Hardfork update is that it would solve Ethereum’s high fee problem. High fees in the time of high network congestion is an issue of scalability, not inefficient fee mechanisms. Therefore, the Ethereum 2.0 upgrade or Layer 2 scaling solutions are the only ways out.
Aside from EIP-1559, other proposals mainly affect the developer community. Nonetheless, EIP-3554 aims to delay the difficulty bomb by 9,700,000 blocks. The difficulty bomb is a mechanism that would freeze mining when the network transitions from proof-of-work to proof-of-stake.