Understanding ethereum London's upgraded EIP and its potential impact
HashKey Cui Chen: Understanding ethereum London upgrade EIP and Potential Impact
Chen Cui is with HashKey Capital Research
Review: Zou Chuanwei, chief economist at Wanxiang Blockchain
The history of Ethereum
There are four stages of ethereum development: Frontier, Homestead, Metropops, and Serenity. Tranquility is the final phase of Ethereum, marking the stage 2.0 of Ethereum. Ethereum 2.0 differs from version 1.0 in a number of ways, including the shift of consensus mechanism from PoW to PoS, and the shift of block structure from single chain to multi-chain sharding. This is a long-planned development path that will reduce the energy consumption of mining and achieve greater efficiency while ensuring safety. In order to improve the availability of the system and the goal of moving towards Ethereum 2.0, the Ethereum network needs to be continuously upgraded, and the Hard fork in London, which is expected to take place on August 4 at block height 12965000, is one such network upgrade.
The network upgrade of Ethereum is implemented through off-chain governance. Community members propose an EIP (Ethereum Upgrade Proposal) and agree on the EIP content to be used for the upgrade. The development team updates the client. Finally, miners use the latest version of the Ethereum client and upgrade through a hard fork. Since its inception in 2015, Ethereum has gone through several upgrades, with dates and names listed in the table below, that have helped it improve and reach its final stage.
Table 1: The dates and names of previous Ethereum hard fork upgrades
EIP 1559 and EIP 3554 have the most impact on the network. EIP 1559 and EIP 3554 have the most impact on the network. EIP 1559 and EIP 3554 have the most impact on the network.
Table 2: London hardfork upgrade names
Impact of EIP 1559
EIP 1559 was first proposed in 2019 and, after much discussion and code implementation, will finally be available after the London fork. EIP 1559 will take a completely different approach to gas fees and is designed to add value to the Ethereum network. Under the current fee rules, the fees are set by the user and are all earned by the miner, and the higher the fee, the faster the transaction is packaged into the block. Ethereum's resources are limited and fees are collected through auctions, which can rise when the network is congested and the number of transactions to be confirmed increases.
Under the new rules proposed in EIP 1559, the fee is divided into two parts, the base fee and the miner's tip. The base fee is the minimum cost of the transaction, which is destroyed directly by the system, and the gratuity goes to the miner. The new rules do not specify the Gas PMIT of the block, the size can be flexibly changed and the base fee can be adjusted accordingly. The current Gas PMIT of the block is 15 million. Although there is no Gas PMIT limit in the future, the target value is 15 million. The block capacity can fluctuate from 0 to 30 million. If the block contains more than 15 million gas, the base fee will be increased by 12.5%, whereas if it is less than 15 million, it will be reduced by 12.5% until it goes to zero. When the network is congested, the base fee increases exponentially. If the block size exceeds the target value for nearly five consecutive minutes (approximately 21 blocks), the user's base fee increases tenfold, and for nearly 10 minutes the base fee increases 100 times. Users will have to wait for the block capacity to decrease to reduce the base fee, which seems to alleviate network congestion, but it does not solve the problem. Network expansion is needed to improve performance.
EIP 1559 improves the efficiency of commissions, mainly on the user side. Users used to have to estimate fees based on network congestion and recent gas prices. Too little and the waiting time will be longer; too much and the waiting time will be wasted. At the block level, EIP 1559's scheme allows the base fee to vary by up to 12.5% from block to block, allowing users to predict and pay a relatively accurate fee based on the rules to improve the user experience.
For the Ethereum ecosystem, the destruction of the base fee will have a greater impact, slowing down the rate of INFLATION of ETH tokens. It is now producing around 13,000 ETH a day and inflation is running at around 4% a year. Dune Analytics data shows that if EIP 1559 were followed, an estimated 2,937,123 ethereum would be destroyed over the course of a year, or 61.9 percent of secondary issues, which would reduce inflation to 1.5 percent. That is less than bitcoin's 1.8% inflation rate, which could turn negative if too much is destroyed. By destroying the base fee, the use value of the network can be more closely tied to the value of THE ETH, increasing the value of the ETH to some extent.
In contrast, the implementation of EIP 1559 will inevitably result in the loss of miners' income. The more congested the ethereum network, the higher the fee income of miners, which can account for more than half of the total revenue at most, miners will rely on block rewards in the future. EIP 1559 has no impact on miners' MEV revenue, which will be taken up by the expansion of DeFi.
There are two main guesses about the resistance to the implementation of EIP 1559, one is the manipulation problem, the other is the bifurcation problem, but the possibility of both implementation is very small. The pricing of base fees is influenced by block size and can only be manipulated by miners. However, since the base fee is completely destroyed and will not be owned by the miners, there is no incentive for the miners to manipulate the block size, and the miners' group is a decentralized organization, it is impossible to implement uniform manipulation, and ultimately the base fee will be determined by the market. This upgrade is in the form of a hard fork, there is a possibility that the miners are dissatisfied with this fork, but the miners are not the whole community, and the fork is difficult to occur without community support.
Impact of EIP 3554
Ethereum 2.0 goes through three phases, Phase 0,1 and 2. The tasks to be implemented in these three stages are PoS consensus, data sharding and transaction sharding respectively. The sharding structure of Ethereum 2.0 is composed of a beacon chain and a sharding chain. The beacon chain is responsible for communication between the sharding chains and is the core of the framework. Currently, Ethereum is up on the beacon chain and PoS mining has started, while PoW mining still exists, and will not go away until Ethereum 2.0 is ready. Under normal conditions, PoW miners will not actively quit mining because they have paid the cost of mining machines and other hardware facilities. Ethereum achieves the PoS consensus shift by reducing block rewards and setting difficulty bombs.
Figure 1: Ethereum 2.0 framework
Reducing block rewards directly reduces miners' mining rewards. Block rewards have been reduced from the original 5 ETH in Constantinople to 2 ETH. Difficulty bombs are designed to increase the difficulty of mining, making PoW blocks harder and harder, thus transferring consensus to the PoS network. Therefore, the time point chosen by the difficulty bomb is very important. It can only be implemented after the ethereum beacon chain is fully able to undertake the whole network transactions. The early explosion will affect the SECURITY of PoW network. The difficulty bomb has been delayed three times so far, culminating in an upgrade of muir Glacier with a block height of 9.2 million and a difficulty bomb delayed by 4 million blocks in August this year. EIP 3554 for the London hard fork delayed the difficulty bomb until December.
Figure 2: Ethereum's network difficulty, with red boxes representing upgrades of delayed difficulty bombs
In the next hard fork upgrade in Shanghai, it is expected to include ETH 1 and ETH 2 merger. If it can be completed on time, the difficulty bomb will appear according to the scheduled time, but the difficulty bomb will not have a significant impact in a short time. The cost of mining has a lot to do with the price of the currency. Historically, the power of Ethereum has not plummeted because of the decrease in block rewards or the increase in the difficulty of the network. Instead, the falling price of Ethereum is the main cause of the decline in the overall power of the network. In order to limit PoW mining and get miners to quit voluntarily, it is also necessary to implement difficulty bombs for a longer time or significantly lower block rewards.
Figure 3: Ethereum network computing power, mainly influenced by the price of Ethereum
Impact of other EIP
EIP 3198 was implemented to assist EIP 1559 with the addition of the BASEFEE opcode with the purpose of returning the BASEFEE for the current block. After EIP 3541 is implemented, the network will reject new smart contracts starting with 0xEF. Existing smart contracts will not be affected. This is in preparation for the next proposal for the EVM object format, and can be used for other purposes if the next proposal is not deployed.
EIP 3529 has modified the refund of gas for some opcodes, which will affect gas Token usage. Ethereum's GAS pricing, which involves cleaning up status and storage slots and removing contracts with self-destruct opcodes, is negative for gas charges, which means gas will be returned up to half of the amount consumed at creation. According to this feature, users can spend Gas to create these smart contracts when the Gas Price is low, and clean up and delete Gas when the Price is high to get Gas for other transactions, thus realizing the arbitrage of Gas fees. For example, GST1, GST2, and 1inch CHI are Gas tokens using different mechanisms. EIP 3529 cancles the refund of SELFDESTRUCT opcode to GAS and reduces the refund of SSTORE opcode to GAS, which will result in the failure of gas Token. Reducing the number of Gas tokens will help reduce the unnecessary use of Gas to occupy network resources, and also avoid the change in block size caused by the return of Gas.
Thinking and summarizing
Ethereum has undergone several hard fork upgrades prior to the London hard fork, and it is expected that the merger of Ethereum 1.0 and the beacon chain will occur after the next Hard fork in Shanghai. The London upgrade includes five EIP content, among which EIP 1559 adjusts the handling fee and EIP 3554 delays the difficulty bomb.
EIP 1559 improves the user experience by making fees more efficient and can increase the ecological value of the Ethereum network in general. However, the problem of network congestion and high fees cannot be fundamentally solved, which needs to be realized by layer 2 expansion or Ethereum 2.0. The delay of the EIP 3554 on the difficulty bomb allows it to be implemented when the beacon chain PoS is fully ready to induce miners to abandon the PoW chain. In addition, the London hard fork will also affect the use of Gas tokens, which will become invalid later, but will help release unnecessary cyber space.
Upgrades to the Ethereum network usually take the form of hard forks, and the biggest difference between hard forks and soft forks is compatibility with older versions. Hard fork ensures that all nodes are upgraded to the latest version. Otherwise, other nodes that have been upgraded will not accept the hard fork. Ethereum has changed a lot in the 2.0 phase of the upgrade, requiring all nodes to be consistent and use the same version. In order to prevent the community from splitting, Bitcoins often use soft forks to upgrade, such as quarantine witness. To prevent a hard fork from causing a split in the community, many public chains use automatic upgrades after a proposal is passed. Ethereum's strong community consensus prevents a real fork, and vitapk-backed proposals typically get community support. Even if some elements of a London hard fork are opposed by miners, there is little chance that it will split the community.
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