Ethereum completes London upgrade, ushering in a new era of deflation

At 8:33 p.m. Beijing time tonight, the Ethereum network reached the established block height of 12,965,000, completing the London hard fork upgrade, and implementing a total of five community proposals: IP-1559, EIP-3198, EIP-3529, EIP-3541 and EIP-3554.

The latest data from Ethernodes shows that 1,254 Ethereum nodes (78%) have completed the London upgrade, and the remaining 354 nodes (22%) have not yet completed the upgrade. Among them, 71% of Geth client nodes, 96% of Openethereum, 85% of Erigon and 56% of Nethermind client nodes have completed the upgrade.

This upgrade is the tenth hard fork upgrade in Ethereum’s history, and it is also the most watched by the outside world.

On the one hand, EIP-1559, the highlight of this upgrade, has been controversial from its proposal to its implementation, which once caused dissatisfaction among miners. Some mining pools tried to demonstrate by gathering computing power, but ultimately failed to change the tide. On the other hand, this upgrade was originally scheduled for mid-July, but was later postponed, and a vulnerability was discovered two weeks before its official implementation, which once again added uncertainty.

Fortunately, the dust has settled, and Ethereum has successfully completed the penultimate upgrade before merging into Eth2.0. The final "Shanghai Upgrade" is tentatively scheduled for October this year. The POS era of Ethereum is coming.

1. The twists and turns of EIP-1559

Although it is called a "hard fork upgrade", this London upgrade did not generate any new coins, reminding the majority of crypto investors to be careful to identify and avoid the risk of counterfeit coins. In addition, for ordinary coin holders, there is no need to perform any operations (transfer or exchange coins), and the relevant updates are carried out by the Ethereum node and client.

The following is an introduction to the key points of this upgrade, a total of five community proposals (EIP), namely:

EIP-1559: Changes to the fee market of the ETH 1.0 chain;

EIP-3198: BASEFEE opcodes;

EIP-3529: Reduce refunds;

EIP-3541: Reject new contracts starting with 0xEF bytes;

EIP-3554: Difficulty bomb delayed until December 1, 2021.

The most notable one is EIP-1559. The proposal was first proposed by Ethereum founder Vitalik Buterin three years ago and was later improved by community members. It aims to change the transaction fees of the Ethereum network. However, since the Ethereum network was less used and the Gas fee was not expensive at the time, the proposal did not cause much waves after it was proposed. Until last year, when DeFi became popular and the Ethereum ecosystem ushered in a big explosion, the Gas issue became an unavoidable problem, and EIP-1559 once again entered the public eye.

Let me briefly introduce EIP-1559. In the past, when users transferred money on Ethereum, they had to pay a gas fee to miners on demand, and miners could prioritize transactions with high gas fees. After the implementation of EIP-1559, the gas fee will be sent to the network itself as a base fee (basefee) for destruction, and users can also selectively pay a tip (inclusion fee) to miners. The setting of the base fee is determined by the algorithm, with the aim of making it easier for users to pay reasonable fees.

Therefore, the proposal has won the support of users and developers, but miners are not interested in it.

On the one hand, with the development of DeFi and the soaring gas fees, half of Ethereum miners' income comes from gas fees. Once EIP-1559 is implemented, it will directly affect miners' income and naturally will not be liked by miners.

But more importantly, the miners believe that they have become part of the ecosystem that has been abandoned. In the past few years, the price of Ethereum was low and the ecosystem did not develop. Miners held on to maintain network security. Now, with the development of DeFi, the entire Ethereum ecosystem is thriving. In order to reduce gas fees and reduce miners' interests, it is naturally unacceptable. Moreover, EIP-1599 was previously implemented in Filecoin for a period of time, but the effect was not good, which made miners even more angry.

As a result, miners have spoken out against the implementation of EIP-1559. According to statistics, 12 large and small mining pools, including Spark, Ethermine, and Flexpool, have issued statements opposing EIP-1559, accounting for more than 60% of the total computing power. In addition, in March this year, a Twitter user "Red Panda Mining" launched a campaign calling on miners who opposed EIP-1559 to switch their computing power to the opposition mining pool for demonstration and to declare sovereignty, but ultimately failed.

Although the miners did not change the final result, the Ethereum community still heard the voices of the miners. It should be noted that the voices and demonstrations were carried out in a relatively mild manner and did not cause a split in the Ethereum community.

2. Will upgrading bring about "deflation"?

Ethereum's ecosystem token ETH does not have a set total issuance amount and is always in a state of inflation. Although V God proposed in 2018 to set the upper limit at 120 million, it was not actually implemented and ultimately became just a fantasy.

One of the important reasons why this London upgrade has attracted so much attention is that after the implementation of EIP-1559, the base fee (basefee) paid by users will be burned, pushing Ethereum into the "deflation era."

Kyle Samani, co-founder of investment firm Multicoin Capital, said: "The London upgrade is one of the most interesting and important upgrades in Ethereum's history. By reducing the supply of tokens, it can increase scarcity and increase prices."

According to the EIP-1559 tracking website Watch the Burn, about 800 ETH test coins were destroyed one day after the Ropsten test network was upgraded and deployed in London. According to this data, the annual destruction will reach 300,000 ETH. And the more active the network, the greater the destruction. According to the real transaction volume of the Ethereum network in the past year, if EIP-1559 had been deployed in August last year, the ETH destruction would exceed one million. This data based on assumptions sounds a bit exaggerated, but it undoubtedly gave Ethereum investors a shot in the arm.

(Note from Odaily Planet Daily: Ethereum just completed the London upgrade, burning 54 ETH in half an hour; according to this data, the amount of destruction will reach nearly 2,600 ETH a day, and about 950,000 ETH a year.)

Bloomberg's calculations show that Ethereum's London upgrade will reduce the supply rate of ETH. By destroying part of the 13,000 new ETH issued daily (gas fees paid to miners) as basic fees (approximately 25-75%), this move will reduce ETH's annual supply by about 4% and is expected to push up ETH's price. After switching to POS next year, the supply may fall further.

The market's confidence in this upgrade is also reflected in the recent price trend of ETH. In the past half month, the price of ETH has climbed from the staged bottom of $1,718 and continued to rise above $2,700, with the highest increase exceeding 60%. However, after comparing the past three hard fork upgrades, Odaily Planet Daily found that the price of ETH generally fell by 15% to 20% within one to two weeks after the upgrade. Therefore, users are reminded to pay attention to short-term risks and avoid using leveraged products.

Of course, in the long run, the price of ETH depends on the growth of its ecosystem. In the past year, Ethereum has successfully taken off with DeFi applications, and the price of ETH has soared from $300 to more than $4,500, an increase of more than 15 times.

“DeFi is building a more accessible and democratized alternative financial system, primarily built through decentralized applications on the Ethereum network. These developments bode well for the future of the financial industry, and effective regulation will facilitate the continued growth of the DeFi industry.” Iwa Salami, a senior lecturer at the University of East London, expressed confidence in Ethereum’s DeFi cause.

Dan Morehead, founder of Pantera Capital, said that the London upgrade will help Ethereum catch up with Bitcoin and make Ethereum more like a fixed asset. "We will see a shift in people, and they will also use ETH to store wealth, not just Bitcoin. The widespread adoption of Ethereum DeFi will also make it larger than Bitcoin."

3. Be more courageous after setbacks and move towards the future

Ethereum has been around for seven years since its birth in 2014. As one of the earliest public chains, Ethereum has been known as the "King of Public Chains" for its innovation.

USV partner Joel Monegro once described the Ethereum community as chaotic but vibrant - full of vitality in chaos, which is indeed the case.

The confusion lies in: on the one hand, after the 1CO fundraising demand dropped sharply, the price of ETH has been falling, and the return is far lower than other mainstream currencies; on the other hand, the repeated delays of Eth2.0 have caused doubts about "drawing big pie in the sky", and it is unknown when it will be implemented, and the future of miners is uncertain; in addition, frequent community debates, governance difficulties and other events have also made the outside world doubt the stability of the Ethereum ecosystem.

The vitality lies in: Since June 2020, the outbreak of DeFi has brought new ecological prosperity to Ethereum. DeFi applications on the Ethereum blockchain have continued to grow, and many phenomenal products such as Uniswap, Compound, and AAVE have emerged; in November 2020, Eth2.0, which has been "difficult to deliver" for many years, finally arrived, and the beacon chain was officially launched. The current ETH 2.0 deposit contract address has received 6.51 million ETH, accounting for 5.6% of the Ethereum supply.

Although Ethereum always misses deadlines, has a slow development process, and often encounters various problems (bugs appeared before multiple upgrades), the overall trend is positive. It has always fulfilled its promises and has never stopped.

After the London upgrade, Ethereum is about to usher in the last upgrade of the "Quiet" phase - the Shanghai upgrade (tentatively scheduled for October this year), which is also the last step to merge Eth1.0 into Eth2.0. After that, Ethereum will hopefully solve the performance problem and "become a true world computer", and we are looking forward to this day coming soon.