Ethereum’s Hard Fork: What it is and why it matters

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Earlier this week, a major change to the main blockchain network of Ethereum, known as the ‘London’ upgrade, went live in a process known as a ‘hard fork’, a major change in the computer code of the network that effectively splits it from its previous version.


The overhaul, in particular the Ethereum Improvement Proposal 1559 (EIP-1559), have been hailed by many in the crypto sector as a major shift in the economics of the digital currency and how it could be used going forward.


The upgrade has also been welcomed by the market, with Ethereum’s price up 6.3% in the last 24 hours at US$2,769.


But what exactly are the London upgrade and EIP-1559 and why do they represent a drastic change for Ethereum?


What EIP-1559 changes


One of the major changes to the Ethereum network introduced by the London upgrade, specifically by EIP-1159, is the way transactions on the network are processed and validated.


Currently, when a user makes a transaction on the Ethereum network, they pay a fee, known as a ‘gas’ fee, to the Ethereum miner that validates the transaction. While this system seems simple, the rapid growth of activity on the network in recent years means gas fees have increased by such an extent that small or frequent transactions have become too costly to be viable.


The EIP-1559 upgrade aims to remedy this by introducing a ‘base fee’ that is set automatically by a user’s crypto wallet, while also offering the option to ‘tip’ miners to speed up the transaction.


However, the base fee itself does not go to the miners but is instead ‘burned’ (removed from circulation) by the network to regulate the supply of Ethereum.


Why are these changes important?


The upgrades are designed to make fees on the network more predictable for users while also reducing the amount of Ethereum in circulation over time, which could cause its value to rise if demand continues at a similar level.


Burning some Ethereum as part of every transaction could also make the crypto more effective as a wealth storage asset, which some believe it could encourage more institutional investment in Ethereum in the long term.


However, some Ethereum miners have opposed the upgrades to the network by arguing it risks creating a rival to the old blockchain network, which will continue to exist after the hard fork, similar to what occurred during a similar hard fork in 2016 which created the Ethereum Classic crypto.


There are also concerns that the new fee structure, which will see miners receive less per transaction, will cause miners to leave the network or, if they are particularly aggrieved, sabotage it.


This is just the start


Despite the London upgrade being hailed as a major shift for the Ehtereum network, it is not the last fundamental change for the blockchain in the diary.


Since early 2021, an upgraded version of the Ethereum network, known as Ethereum 2.0, has been running side-by-side with its older sibling, however, the original blockchain is expected to eventually merge with 2.0 with all existing Ethereum holdings migrating over. This process began in December last year and is expected to take around two years to complete.


A big difference for Ethereum 2.0 is that it uses a ‘Proof of Stake’ mechanism to verify transactions. This involves network participants contributing some of their Ethereum to a ‘pool’ in return for a crypto reward, similar to an interest rate on a savings account.


Proof of Stake is different to crypto mining, also known as ‘Proof of Work’, which involves users contributing computing power to validate transactions. Bitcoin and the current Ethereum network use proof of work to function, however, it requires large amounts of energy and is slower and arguably less secure than Proof of Stake.


The energy use of crypto mining, as well as its contribution to global emissions, has been a key point of controversy around crypto in recent months, however, the migration of a major crypto like Ethereum to the less energy-intensive Proof of Stake method could convince some environmentally-conscious sceptics to take another look at the world’s second-largest digital currency.

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