The Battle of Constantinople, Ethereum’s Breakout

1. Background

As the second phase of Ethereum Metropolis, the Constantinople hard fork aims to lay the foundation for Ethereum's eventual transition to the fourth phase of the PoS mechanism by reducing costs and improving blockchain efficiency. The name of the Constantinople hard fork originated from Constantinople, the capital of the Eastern Roman Empire. Since Ethereum founder Vitalik is Russian, and Russia has historically inherited the Eastern Roman Empire's Eastern Orthodox tradition, it was named after it.

Recently, a spokesperson for the Ethereum Foundation said that the Ethereum "Constantinople" fork will be activated on March 1; at that time, the related improvement plans for this round of hard fork will be officially deployed on the Ethereum mainnet. The market generally believes that through this hard fork, Ethereum's transaction processing speed will increase significantly, and the reduction in ETH production will help its price increase. Now let's take a closer look at this "Constantinople" hard fork and its impact on the future of Ethereum.

1.1. Hard Forks and Soft Forks

As we all know, blockchain is a distributed consensus system. For a distributed system, if you want to introduce some new features, you must coordinate all the participants in the system. Because every time the system is upgraded, not all nodes will update the version in time, which causes the nodes that have upgraded the software and the nodes that have not upgraded the software to run under different rules, so there is a fork. To give a simple example, when we use Microsoft's Word 2003 and Word 2016, we will find that many formats are incompatible, and the fork of the blockchain network is similar. Before introducing "Constantinople", we also need to understand what hard forks and soft forks are.

A hard fork is a protocol revision that introduces new features, which may invalidate the previous version of the protocol. That is, blocks that are considered valid by nodes running the new version of the protocol will be considered invalid by nodes running the old version of the protocol. Old nodes will believe that other branches are the longest and valid branches of the blockchain, and will continue to expand this branch until all old nodes have upgraded their versions. A soft fork, on the other hand, adds new features to the protocol, making the existing verification rules more stringent. At this time, old nodes will still receive all blocks, while new blocks will reject some. At this time, old nodes may mine some invalid blocks, which will incentivize old nodes to update the protocol. This can avoid permanent splits caused by hard forks, and only produce some temporary small forks.

In short, the rule changes caused by hard forks are not forward compatible, and old nodes cannot recognize the blocks generated by new nodes, so the new and old nodes will start running on different chains; while the rule changes caused by soft forks are forward compatible, and old nodes can be compatible with the blocks generated by new nodes.

1.2. Ethereum’s development path

At the beginning of its design, Ethereum's goal was not just to be a digital currency like Bitcoin, but a decentralized application platform. Before reaching its ultimate goal, it needs to go through different upgrade stages, and in each stage Ethereum will introduce new features to make the system more stable and powerful. To this end, the founding team of Ethereum set four development stages for it: Frontier, Homestead, Metropolis, and Serenity, and the transitions between different stages are achieved through hard forks.

1.2.1. Frontier

Frontier is the initial trial phase of Ethereum in July 2015. As the initial version of Ethereum, it adopts a model similar to Bitcoiners. The software at this stage is not yet mature, equivalent to a blank version of the Ethereum network, with only a command interface and no graphical interface, but it can perform basic mining, learning, and testing of distributed applications (DApps). This version is mainly aimed at professional developers, and the technical development threshold is relatively high.

1.2.2. Homestead

Homestead is the first official product release of Ethereum, released in March 2016. Compared with the "frontier" stage, the "homestead" stage has no obvious technical milestones, but only shows that the Ethereum network can run normally and smoothly. The Ethereum team plans to use the PoW mechanism in the early stage and gradually switch to the PoS mechanism in the later stage. The use of the PoS mechanism will lower the threshold for mining, because under this mechanism, there is no need to buy expensive hardware mining machines. For miners, the mining machines they bought at a high price will be useless, which is bound to cause dissatisfaction among miners. In order to prevent miners from uniting to resist in the process of switching from the PoW mechanism to the PoS mechanism, thereby forking to produce two public chains, the Ethereum team introduced the difficulty bomb in the "homestead" stage.

The so-called difficulty bomb refers to the addition of a difficulty factor that increases exponentially every 100,000 blocks in addition to the adjustment based on the block time and the difficulty of the previous block when calculating the difficulty. As the block height increases, the proportion of the exponentially growing difficulty factor will increase significantly, making it much more difficult to produce blocks, and it will be difficult for miners to mine new blocks. As blocks become increasingly difficult to produce, the blocks will eventually be completely frozen and unable to be produced. This process is also called the "Ice Age". With this expectation, the hard fork caused by switching to PoS will not be a difficult choice.

The original intention of the difficulty bomb design was good. However, due to various reasons, Ethereum's plan to switch to the PoS mechanism has been continuously delayed, which has also delayed the transition time from the PoW mechanism to the PoS mechanism. In order to maintain the normal operation of the Ethereum network, the difficulty bomb code has been modified many times to delay the arrival of the "Ice Age", so its incentive effect is no longer as good as before.

1.2.3. Metropolis

"Metropolis" is the third stage of Ethereum's development, which will be divided into two parts: "Byzantium" and "Constantinople". We are now in the Byzantium stage of Metropolis, and on March 1, 2019, Ethereum will usher in the "Constantinople" fork.

The "Byzantine" fork began in October 2017, when the Ethereum network successfully achieved a hard fork around block 4370000. At this stage, Ethereum still used the PoW mechanism 100%, but Ethereum introduced a graphical interface that non-technical users could use easily, which is the Mist browser. In addition, due to the obstruction of the development of the PoS mechanism, in order to prevent the difficulty bomb from affecting the performance of the network, Ethereum also calculated the mining difficulty according to the height of 3 million blocks back, so the block time returned to about 15 seconds, but in order to prevent inflation, the block reward was also reduced from 5ETH to 3ETH.

1.2.4. Serenity

"Serenity" is the fourth phase of Ethereum, and the specific time is yet to be determined. In this phase, Ethereum will fully use the PoS mechanism, and the Ethereum network will no longer need miners to mine. At the Devcon 4 conference, Ethereum founder Vitalik detailed the major changes that will occur in Ethereum during the serenity phase.

In the "Quiet" plan, Ethereum will add a PoS chain in addition to the PoW chain - Beacon Chain. There will be two roles on this chain - block producers and validators. Depositing 32 ETH on the chain will make you a confirmer, who has the right to generate blocks and will have the opportunity to be selected as a validator. The final confirmation method on the chain will also be changed from PoW's 6-block confirmation to Casper FFG finality confirmation. In addition, due to the merger of the PoS mechanism development team and the Sharding development team, Shard Chain will be officially launched in the Quiet phase to truly process data and operate independently to improve the efficiency and security of Ethereum.

Currently, the Tranquility Phase will be completed in four phases. The standards for the first two phases have been updated on Github. The specific arrangements for the four phases are as follows:

• Phase 1: Beacon Chain Launch

• Phase 2: Shard Chain Launch

• Phase 3: EVM2.0 launch

• Phase 4: Other improvements completed

2. The twists and turns of the Constantinople hard fork

2.1. Main upgrade proposals of "Constantinople"

The upcoming "Constantinople" hard fork mainly includes five update plans, namely EIP-145, EIP-1052, EIP-1283, EIP-1014 and EIP-1234, as follows:

(1) EIP-145: bitwise shifting

EIP-145 was mainly written by two technicians, Alex Beregszaszi and Pawel Bylica. The current Ethereum virtual machine lacks bitwise shift operators. Although bit shift operations can be implemented through arithmetic operators, the cost is relatively high and the processing time is relatively long. For example, using arithmetic to implement left and right shifts requires 35 gas, while using the EIP-145 solution only requires 3 gas. Therefore, the cost of running certain smart contracts will be significantly reduced after adopting EIP-145.

(2) EIP-1052: EXTCODEHASH opcode

Smart contracts often need to check the bytecode of other contracts, but in many cases, smart contracts themselves do not need the bytecode of other contracts. Checking the bytecode of other contracts is mainly performed through the EXTCODECOPY operator, so if many smart contracts need to be checked, it will be expensive. Therefore, EIP-1052 proposes to use a new operator, EXTCODEHASH, which will return the keccak256 hash of the contract bytecode, which is more efficient and cost-effective.

(3) EIP-1283: Adjusting the net gas metering of the SSTORE opcode

Written by Johnson, EIP-1283 is based on EIP 1087, which introduces a fairer pricing method for data storage changes, which can benefit smart contract developers.

(4) EIP-1014: Skinny CREATE2

EIP-1014 was created by Ethereum founder Vitalik Buterin himself. The proposal introduces the concept of state channels to the Ethereum network. This will allow the settlement of transactions to be carried out off-chain, similar to Bitcoin's Lightning Network. EIP 1014 itself will bring a huge improvement in the throughput of the Ethereum network, so the Ethereum network will be able to process more transactions per second.

(5) EIP-1234: Reduce block rewards & delay difficulty bomb

Because the current Casper mechanism cannot ensure 100% security, Ethereum adopted EIP-1234 this time, which mainly introduced two proposals: one is to delay the difficulty bomb for 12 months, and the other is to reduce the blockchain reward from 3 ETH to 2 ETH to prevent inflation caused by the delayed difficulty bomb.

After this fork, the Ethereum network will be lighter, faster and more secure. However, among the above proposals, the most controversial one is EIP-1234, because it reduces the block reward from 3 ETH to 2 ETH, directly reducing the income of miners.

2.2. “Saint Petersburg” plan

"Constantinople" was first tested on Ethereum's public test network Ropsten in mid-October last year. It was originally planned to start the hard fork in mid-October last year, but before the fork, the developer team claimed that they encountered "consensus problems" on the test network, which has now caused a test network to be "unusable". Therefore, the hard fork was postponed to block 7,080,000, which is late January this year. However, on January 15, on the eve of the fork, the smart contract audit company ChainSecurity discovered that EIP-1283 had a vulnerability that could be attacked. For this reason, the "Constantinople" fork had to be postponed again.

The repeated delays of the "Constantinople" fork have hit the market's confidence in Ethereum. The Ethereum team considered that fixing the EIP-1283 vulnerability would further delay the Ethereum fork. On the other hand, several Ethereum test networks, including Ropsten, have upgraded all five proposals of the EIP containing the vulnerability. For this reason, the Ethereum core developer team proposed the "Saint Petersburg" plan, which is to activate the "Saint Petersburg" plan after executing the five original EIPs in "Constantinople" on block 7,280,000, and safely remove EIP-1283.

3. The actual impact of hard forks

3.1. The battle of public chains, Ethereum started the battle of foundation

As the king of traditional public chains, Ethereum has played an important role in all stages of blockchain development. It can be said that Ethereum is the most successful public chain platform besides Bitcoin. Ethereum has occupied half of the market in terms of project fundraising, decentralized applications, and games. Whether it is the project fundraising craze from 2016 to 2018, or the popularity of CryptoKitties in 2017, Ethereum has been a leader in the future blockchain journey, bringing imagination that Bitcoin cannot match to the blockchain world.

Indeed, in 2018, with the rise of the DPoS mechanism, public chains such as EOS and TRON have made different attempts in blockchain implementation, and have gradually eroded Ethereum's advantages. In particular, compared with the high processing speed of DPoS, Ethereum seems to be stretched in terms of applications, which also made developers choose the new generation of blockchain platforms represented by EOS and TRON in the wave of games that began in the second half of 2018. However, Ethereum's first-mover advantage still exists. According to DApp Radar statistics, as of February 27, 2019, the total number of Dapps on the three major public chains of Ethereum, EOS, and TRON were 1403, 329, and 167 respectively. The total number of decentralized applications on Ethereum is more than four times the number of Dapps on the other two major public chains combined, and the number of developers is huge. These are all the advantages that Ethereum has over other public chains.

Ethereum is currently criticized for two main aspects: development experience and the inefficiency caused by PoW. In terms of development experience, this fork has also solved this problem to a certain extent, laying the foundation for subsequent revolutionary upgrades. Specifically, in the EIP145 proposal, Ethereum improves its ability to process information through the "bitwise shift" method. In EIP1052, Ethereum will improve its underlying virtual machine to enhance the experience of smart contracts. After this hard fork, Ethereum developers' gas usage and operation experience will be improved.

The problems caused by Ethereum's PoW mechanism are actually the inevitable result of Ethereum's development, which is also related to Ethereum's development strategy. The core of its PoW to PoS strategy is to establish a reliable digital cryptocurrency system through consumption in the early stage. After the system is built, a more efficient PoS mechanism is adopted to ensure the efficiency of the main network operation. At this stage, it is still in the period of building a monetary system, so there will be no fundamental changes to the PoW mechanism this time. However, the state channel and offline solution proposed by EIP1014 will make some second-layer solutions come into play. It is expected that after this hard fork, Ethereum's TPS will increase by 5%-10%, which will improve Ethereum's efficiency to a certain extent, and the introduction of the state channel will also allow Ethereum to be improved structurally.

The upgrade of Ethereum this time mainly lays the foundation for the subsequent revolutionary changes. The development experience and efficiency will be improved to a certain extent, and both developers and users will benefit. The postponement of the difficulty bomb and the reduction of block rewards are the best preparations for the next upgrade. Ethereum founder Vitalik also announced that the next hard fork of Ethereum will be named "Istanbul", and leasing technology will be deployed on the Ethereum main network to start improving the huge storage cost problem of Ethereum. It can be said that the advantage of Ethereum is the continuous improvement and enhancement of Ethereum by developers. Although this hard fork has twists and turns and is mainly a minor improvement, for Ethereum, it lays a solid foundation for future changes. In the past six months, although the difficulty of Ethereum has gradually decreased, the on-chain transfer and Gas consumption of Ethereum have not decreased significantly, which reflects the stability of its main network construction and the future is promising.

3.2. Can the price expectations triggered by the hard fork be sustained?

Historically, Ethereum has gone through seven hard forks, including the "Homestead" and "Byzantium" hard forks similar to this "Constantinople". Other hard forks were either for emergencies or were smaller in publicity and scale, and are not comparable to this hard fork. Every hard fork caused by Ethereum's technical upgrade will bring huge market fluctuations to ETH. Based on this phenomenon, we selected the above two historical hard forks for analysis.

According to C’s data, the hard fork of Ethereum’s “Homeland” phase occurred on March 14, 2016. ETH rose by 22.74% in the seven days before the fork and by 136.45% in the thirty days before the fork, but after the fork, the price of ETH fell by 18.68% in seven days and by 46.17% in thirty days. Similarly, the “Byzantium” hard fork that occurred on October 16, 2017 rose by 11.76% in the first seven days before the fork and by 40% in the first thirty days, but fell by 16.76% in the seven days after the fork and by 1.34% in thirty days.

In reality, during the “Homeland” hard fork stage, the release of the Frontier version of Ethereum in the second half of 2015 allowed people to see the technical strength of Ethereum and the potential of smart contracts. Therefore, the market was generally optimistic about the upcoming “Homeland” version. Therefore, Ethereum was in an upward channel in the months before the fork. There must have been an accumulation of bubbles in this process. After the hard fork, the market’s optimistic expectations also ended. Therefore, a drop in the price of ETH after the hard fork became inevitable.

During the “Byzantium” hard fork phase, although the Ethereum team announced new features introduced in the “Metropolis” era, the “Byzantium” fork proposal did not bring any qualitative changes to Ethereum. Therefore, although the ETH price rose slightly a few days before the fork, the market did not react much to the “Byzantium” fork.

As for the "Constantinople" hard fork, the market's patience has long been exhausted due to the repeated postponements of the hard fork plan; judging from the upgrade proposal, it has not brought any substantial changes to Ethereum; and the cold winter of the digital currency market is far from over, so we expect that this hard fork will not bring much change to ETH's price changes, but small fluctuations may still occur. After all, in the cold winter of the blockchain industry, Ethereum's hard fork is still the focus of market attention.

Author: Li Lianxuan, senior analyst at TLAB, Master of Finance from Nankai University

Jiang Zilong, Managing Director of TLAB