How Does Ethereum EIP 1559 and London Hard Fork Affect the Average Users?

The London Hardfork introduced the biggest Ethereum protocol upgrade to date through EIP 1559. Here's what it delivers to users.

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BSCNews
on
August 12, 2021
Category:
Blockchain News

The London Hardfork Effect

The Ethereum Hard Fork arrived last week––Aug. 5–amidst plenty of noise and fanfare. The blockchain’s fork brought changes with varying degrees, much of which was behind the scenes. But how do the changes affect users? 

The stakeholder benefits of the London hard fork can be analyzed from three key perspectives: 

1. Speed and Efficiency

2. Store of Value

3. Scalability

The average Ethereum network user is mainly concerned about network congestion and high gas prices. The London Hard Fork looks to combat these two concerns by adapting Ethereum from proof-of-work to proof-of-stake. EIP 1559 was a specific part of the hard fork designed to remedy the massive volatility with its fixed-price sale. 

Source: Gas fees on the Ethereum network was unpredictable and expensive when the network becomes congested

Congestion on the Ethereum network has resulted from spikes in network fees caused by the first-price gas fee auction mechanism. The Achilles heel of Ethereum for some time was this issue of congestion. This saw users and developers find alternative platforms that provide stable gas fees and speedier transactions, like Binance Smart Chain

Source: The Fear and Greed Index is used as a measure of the overall market sentiment towards a particular asset

Approximately a week after its successful implementation, the Ethereum network has been running without any glitch. The overall market sentiment has been positive. 

Investors are starting to return. Ethereum is now trading at $3,200, its highest level since May 2021. It has also recently outperformed Bitcoin. 

Ethereum has a specific role to play in the crypto ecosystem. The blockchain is where builders started many of the original Decentralized Finance (DeFi) and Non-Fungible Token (NFT) projects. Ethereum’s continued efficiency is essential to crypto.   


Speed and Efficiency

With the hard fork, the gas fees are determined by an algorithm. The use of mathematics is to prevent fee manipulation. Manipulation happens when miners deliberately cause congestion on the network by choosing what goes into each block and in what order. 

In a February post for Paradigm Research, Charles Noyes referred to this as Miners Extractable Value (MEV) or the ‘invisible tax.’ Miners can arbitrarily include, exclude or re-order transactions within the blocks they produce. More or less, miners could rearrange the transactions to benefit themselves.


Source: MEV can be actively manipulated to increase a miner’s revenue

The EIP 1559 introduces a base fee and removes the first-price auction mechanism to mitigate the MEV. Miners can no longer receive incentives for artificially causing congestion inflates network fees. 

The switch also directly affects users and transaction speeds. Less congestion means speedier transaction validation. With the upgrade, a user can pay a ‘priority fee’ to incentivize miners to prioritize the specific transaction. 

Curiously, EIP 1559 did not promise a lower network fee. But by introducing a more transparent fee structure, there is no longer a fee bidding war that ends in overpaying. With more predictability, users do not end up bidding at high prices merely to gain priority. 


Store of Value 

Like gold, Bitcoin is scarce––with a maximum supply of 21 million and limited growth. The growth is controlled by a halving mechanism that reduces the reward to miners by half every 210,000 blocks. This halving mechanism slows down the available supply circulating in the market. This is a built-in deflationary model

Like with Bitcoin, the halving and deflationary mechanisms are common among many cryptocurrencies. But prior to the implementation of EIP 1559, Ethereum did not have a deflationary model. Its value is derived solely from its utility. EIP 1559 has introduced a burn mechanism to help control the supply of Ethereum. 

On Ethereum, the burn rate rises with increased usage. This is a security feature which makes attacks more costly, and it also changes the characteristics of Ethereum. It can now share the deflationary narrative with Bitcoin. In essence, Ethereum has become more attractive as an asset with this deflationary model.    

Source: Ethereum base fee is burned, creating the same effect as Bitcoin’s halving  

Users will see increased value for their Ethereum. Less circulating supply will create an upward pressure that will raise the price of Ethereum. This is apparent with Ethereum appreciating as the London hard fork approaches and a week after the hard fork. 


Scalability

This protocol upgrade will not resolve the issue of congestion in the short run. Although it introduces block elasticity whereby the platform capacity is doubled, the demand for Ethereum is so great that this will not suffice. 

Solving this will be the main task of Ethereum 2.0. If Ethereum 2.0 is successfully implemented, transaction capabilities will improve to 100,000 transactions a second. This is important as multi-transactional protocols in DeFi exist on the Ethereum platform. Hence, the speed of transactions will be crucial. 


Concluding Remark

EIP 1559 is not a holistic solution to all of Ethereum’s problems. But it resolves the main issue relating to manipulation of fees and overpaying.  Scalability remains the biggest problem that Ethereum must fix to stay relevant.

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