Long & Short Crypto: Why Ethereum’s ‘London’ Upgrade Matters

In T-minus 10 days, the Ethereum blockchain will undergo its 11th backward compatible upgrade, also known as a “hard fork”. This hard fork, dubbed “London,” contains five Ethereum Improvement Proposals (EIPs), each with code changes aimed at optimizing and improving the world’s second largest cryptocurrency by market cap.

Of these five EIPs, EIP 1559 has been the most controversial among Ethereum stakeholders due to its radical overhaul of the network fee market. Today’s briefing features an edited excerpt from CoinDesk Research’s latest report, The Investment Implications of EIP 1559, which explains the risks and reward dynamics of this code change for investors.

One of the most common arguments against Ether (ETH) as a store of value is its unlimited supply of coins.

Bitcoin, the world’s first cryptocurrency, has a prescribed and capped supply schedule that fuels a significant portion of its narrative with investors as “digital gold.”

Although EIP 1559 does not introduce a bitcoin-like supply cap on ETH, it does activate a mechanism to curb the growth of total supply over time by removing a varying amount of ETH from the market. circulation every time a transaction is executed.

EIP 1559 simulations as of June 8 suggest that activating EIP 1559 in the last 365 days would have burned a total of 2,967,937 ETH for a net 76% reduction in the growth of the ether supply. during this period.

In addition to creating a bitcoin-like narrative of the limited ETH supply, EIP 1559 is expected to improve transaction wait times and remove the uncertainty in the fee market that is holding back dapp adoption by developers and the users.

Finally, EIP 1559 is expected to strengthen the role of ether as a form of payment for the use of Ethereum’s computing resources and interaction with the network’s vast system of dapps by requiring payments of transaction fees on the network are exclusively paid in the native cryptocurrency of the network.

Any technology upgrade comes with risk, and the biggest risk posed by EIP 1559 comes from the proposed changes to reward dynamics and payments to miners, who face reduced earnings for their work with the activation of EIP 1559. Instead of pocketing 100% of the transaction fee, minors will only receive tips from users through optional “drop-in fees”, paid at option by users who seek priority for their transactions.

Changing the dynamics of the rewards by itself will not affect Ethereum’s ability to process blocks or calculations. However, it is possible for disgruntled minors to leave the network, sabotage it, or create a competing chain. If a large portion of Ethereum’s miners went out or revolted, downtime and network security would be negatively affected.

For users and dapp developers, the benefits of EIP 1559 may not prove to be as effective in practice as they are in theory. Failure to deliver on the promised efficiency of the fee market could lead to disillusionment among users and developers. If this happens, Ethereum’s competitors such as Binance Smart Chain and Cardano, the two largest smart contract blockchain platforms by market cap after Ethereum at the time of writing, will no doubt seize an opportunity to take shares in. Marlet.

To assess the subsequent benefits of EIP 1559 and its impact on long-term users after activation, investors can view in real time the number of transactions styled according to the EIP 1559 format in order to track its usefulness in practice through to nodes or public block explorers.

Finally, enabling EIP 1559 presents the risk of unforeseen bugs or malicious behavior by users. A few have already been discovered during the EIP 1559 test process on public and private test networks.

Basically, EIP 1559 is designed to make Ethereum transaction fees less volatile and more predictable. Beyond that, however, the code change presents several potential risks and rewards for Ethereum that will be important to watch out for in August.