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Ethereum London Hard Fork Explained: Addressing Gas Fees


What is the Ethereum London Hard Fork?


The Ethereum London Hard Fork, launched in August 2021, stands as a significant milestone in the Ethereum network’s history. This upgrade introduced key changes to how users interact with Ethereum. Perhaps the most significant update involves how the network handles gas fees, which previously caused frustration and sometimes priced out smaller users during times of congestion. Today we’ll unpack some of its major components and scrutinise the aftermath.


What Did The Ethereum London Hard Fork Aim to Solve?


Remember the latter half of 2020 and the first half of 2021? Ethereum gas prices were through the roof. Increased network activity, driven by things like increasing investment in DeFi (decentralized finance) and the explosion of NFTs (Non-Fungible Tokens), put a massive strain on Ethereum. Like a highway jammed with traffic, transactions slowed down, and prices surged as users tried to outbid each other to get their transactions processed faster.


This situation presented a few key challenges for Ethereum users:


High Volatility

The old system meant that the cost of sending a transaction could swing wildly. You could be looking at a $20 gas fee one minute and a $50 fee the next. This volatility made it difficult to plan and execute transactions effectively.


Unpredictability

Like trying to predict the stock market, forecasting gas fees was often a guessing game, leaving users and developers with little certainty about the cost of network interactions. This unpredictability hampered the user experience, especially for those unfamiliar with the intricacies of the Ethereum network.


Barrier to Entry for Smaller Users

As gas fees spiked, participating in activities like DeFi or buying NFTs became expensive for the average user and was discouraging for new entrants to get started. The Ethereum London Hard Fork sought to tackle these issues head-on.


EIP-1559: Reshaping Gas Fees


At the heart of the Ethereum London Hard Fork is EIP-1559, a proposal designed to bring about a more efficient and transparent gas fee system. Instead of a free-for-all bidding war for gas, each block has a "base fee." This base fee adjusts automatically based on network congestion.


If things are crowded (high demand), the base fee rises slightly. If the network is relatively quiet, the base fee decreases. It’s kind of like a highway adjusting toll prices depending on traffic flow.


Here’s a closer look at the mechanics of EIP-1559:


  • Base Fee: Think of this as the minimum price for your transaction to be included in a block. It constantly adjusts based on the previous block's congestion.

  • Priority Fee (Tip): You can choose to include an optional tip on top of the base fee. This tip incentivizes miners to prioritize your transaction, potentially speeding up its inclusion in the next block.

  • Fee Burning: Here’s a significant change — the base fee is "burned," meaning it's removed from circulation permanently.


This table summarizes the key changes introduced by EIP-1559:



EIP-1559 introduces a more stable and transparent fee market on Ethereum. This benefits both users and developers as it makes transactions more predictable. The Ethereum Improvement Proposal also aims to address the difficulty time bomb, a mechanism designed to encourage the transition to proof-of-stake.


This greater certainty makes interacting with decentralized applications and participating in activities like yield farming more accessible.


Additional Improvements With The ELHF


While EIP-1559 was the star, the Ethereum London Hard Fork bundled a series of other significant Ethereum Improvement Proposals (EIPs) to address other aspects of the network. These improvements were designed to enhance the network's functionality and efficiency.


EIP-3198

Before the London upgrade, while users could see the base fee, smart contracts couldn’t. EIP-3198 changed this by allowing smart contracts to access and use this information.


Why’s this important? This access enables new use cases. Imagine setting dynamic bounties, creating gas futures, and improving the security of various applications. It's all about opening up more possibilities for developers.


EIP-3529, 3541, 3554

Additional upgrades such as EIP-3529, EIP-3541, and EIP-3554, aimed to refine Ethereum's gas refund system, improve the security of contract deployments, and postpone the "difficulty bomb.” This mechanism is built into Ethereum to encourage transitions to new proof-of-work algorithms. Developers use these scheduled hard forks to adjust the timeline as needed.


So, what happened after launch?


Did the Ethererum London Hard Fork deliver the results it hoped to achieve? Here were some of the key outcomes:


Transaction Fee Mechanism (EIP-1559)

Base Fee Burn: The most significant change was the introduction of a base fee that is burned, reducing the overall supply of ETH. This mechanism was intended to make transaction fees more predictable and potentially deflationary for Ethereum.


Fee Market: A more efficient fee market was introduced, where users could better estimate the fees required for their transactions. This helped alleviate the issue of unpredictable gas fees.


Reduction in ETH Supply

Deflationary Pressure: The burning of ETH as part of transaction fees started to introduce deflationary pressure on the Ethereum supply, which was seen as a positive development by many in the community.


Impact on Miners

Revenue Change: Miners saw a reduction in transaction fee revenue due to the burning mechanism. This led to some concerns within the mining community, though block rewards continued to provide significant income.


Network and Community Response


Network Stability: The hard fork was successfully implemented without major issues, and the Ethereum network continued to operate smoothly.


Community Support: The broader Ethereum community largely viewed the London Hard Fork as a success. It addressed some of the key pain points around transaction fees and paved the way for further upgrades, including the eventual transition to Ethereum 2.0.


Market Reaction

ETH Price Increase: Following the London Hard Fork, the price of ETH saw a notable increase, as the deflationary mechanism and improved transaction fee structure were positively received by investors and users.


Conclusion


The Ethereum London Hard Fork stands as a testament to the Ethereum community’s commitment to making the blockchain more user-friendly. It also marked a crucial step toward Ethereum's long-term vision, including the transition to a proof-of-stake consensus mechanism with Ethereum 2.0. Remember though, this upgrade represents one step in Ethereum’s evolution, not the final destination.


FAQ

What Is EIP-1559, and Why Is It Important?

EIP-1559, introduced with the Ethereum London Hard Fork, overhauled the network’s gas fee system. Before this change, users would participate in a sort of bidding war, often leading to unpredictable prices.


EIP-1559 brought in a more transparent, two-part fee structure (a fluctuating base fee and an optional tip). The set fee is burned, which reduces the circulating supply. Most importantly, it implemented a burning mechanism for the base fee, removing a portion of ETH from circulation permanently.

What Happened to Ethereum Gas Fees after the London Hard Fork?
Disclaimer

The information contained herein has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal, or investment advice. Wirex and any of its respective employees and affiliates do not provide financial, legal, or investment advice.


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