Ethereum is preparing to undergo the most significant update in its history when it shifts from Proof-of-Work (PoW) to Proof-of-Stake (PoS) as part of the long-awaited ETH 2.0 upgrade.
After the Berlin upgrade in April, Ethereum will soon undergo another series of improvements as part of the upcoming London hard fork. The changes include the controversial EIP-1559 proposal, which will introduce a change in Ethereum’s fee structure.
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The Ethereum core development team is working on a more scalable PoS chain called the Beacon chain. In parallel, the current Ethereum main chain is undergoing a series of upgrades to help ensure the network is ready for the “merge” when the two chains connect, hopefully later this year.
In April, the Berlin upgrade introduced various Ethereum Improvement Proposals (EIPs) designed to make transactions slightly more efficient in terms of speed and cost. London is the next step on the roadmap. It includes two key improvements, EIP-1559 (Fee Market Change for ETH 1.0 Chain) and EIP-3238 (Ethereum Difficulty Bomb Delay).
Given Ethereum’s high fees, it’s understandable that any change affecting transaction costs will attract significant attention. In late April, the average Ethereum user was paying an all-time high fee of around $70.
Furthermore, in the current model, Ethereum gas prices are a function of supply and demand, meaning they fluctuate constantly. From the beginner user perspective, it isn’t easy to know how to calculate the right cost for a transaction.
Rather than allowing the market to set any rate, EIP-1559 will implement a new transaction pricing mechanism, including a base fee. The base fee is a fixed fee per block levied on any transaction based on its gas usage. The price of the base fee will recalibrate according to the gas target limit, which corresponds to the volume of transactions in blocks. The principle is that this will make base gas fees more predictable, creating a smoother user experience.
The most controversial part of the change is that the base fee won’t go to miners, who earn all transaction fees in their mined blocks today. It will be burned, which some say will make ETH a deflationary currency.
Naturally, miners aren’t particularly happy about this change. However, they don’t lose all ability to earn fees. There will be another discretionary fee option along with the base fee, paid directly to the miner. The overall idea is that users will “tip” miners to get to the front of the queue.
Underlying the controversy, there are relatively sound reasons for implementing EIP-1559. Despite the risks involved in introducing a deflationary mechanism with fee burning, Ethereum, unlike Bitcoin, has never had a cap on issuance.
Until now, there has been no means to introduce scarcity to the supply of ETH. But the shift to PoS ties the ability to attack the network to the limited availability of funds to stake. Therefore, EIP-1559 aims to introduce scarcity to ETH to help secure the Eth2 network against attack.
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The deflationary effect of the fee burning remains to be seen, as does the outcome for miner earnings. But miners have a more considerable change coming up once Ethereum 2.0 goes live with PoS, and ETH mining becomes redundant.
Moreover, while the London update may make it easier to navigate the Ethereum gas fee system, the continued inclusion of a discretionary price option means that it’s unlikely gas fees will miraculously drop overnight.
As part of the transition from PoW to PoS, Ethereum introduced an in-built “Difficulty Bomb,” which continually raises the difficulty level of Ethereum’s Proof of Work computational mining problems. In doing so, block confirmation takes longer than usual, cutting the earning potential for miners. At some point, the difficulty will get so high that it will actively deter any miners, something that’s known as Ethereum’s “Ice Age.”
EIP-3238 ensures that the difficulty bomb won’t hit 30-second block times until around mid-2022. By this time, assuming the PoS transition is in effect, it may be desirable to deter PoW miners from attempting to continue mining the old Ethereum PoW chain.
Miners will need to upgrade otherwise they will stay on the old fork and won’t be able to send Ether. However, users and holders of ETH won’t need to do anything. Their exchange and/or wallet will do all the work for them.
Unfortunately, the chances of any significant changes to the current high fee situation seem dim. It’s a pretty safe bet that we’ll only see real changes to Ethereum’s scalability and fee troubles once the Eth2 upgrade goes live. For most of the Ethereum developers and user community, the switch can’t come fast enough.
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