What Is Ethereum’s ‘London’ Hard Fork, Why It Matters, Or Is It ‘Sell The News’?
A number of upgrade packages are set to go live on the Ethereum blockchain network Thursday as part of the London hard fork. What actually is the London hard fork, why is it important, or is it just a ‘buy the rumor – sell the news’ event?
“Hard fork” is software parlance for a backward-incompatible upgrade, meaning that post-London activation, if you want to stay connected to the Ethereum network, you’ll need to download London.
Thursday’s activation is the culmination of months of work and, at times, drama, particularly as it relates to one of the five Ethereum Improvement Protocols (EIPs), called EIP-1559, that London contains. Earlier this year, upgrade proposal drew opposition from some mining pools, the operators of which argued that EIP-1559 would unfairly cut into their income.
But hold on, let’s take a look at what’s actually coming with the London hard fork.
What is London? And EIP-1559?
London is the overarching title for Thursday’s hard fork, which includes a total of five EIPs. For details on each part of the overall London suite, you can read this post by the Ethereum Foundation from last month.
The main goal of London is to improve the quality of life for Ethereum users. But, while London isn’t going to make Ethereum cheaper to use, it does aim to make the cost of using Ethereum more predictable. The controversial proposal dubbed EIP-1559 was designed to achieve this.
EIP-1559 aims to adjust the makeup of Ethereum’s fee market. A blockchain fee market, simply put, is the function of transactors paying fees on their transactions and miners collecting those fees as they add these transactions to the chain.
The way it works now is that the higher the fee a transactor offers in a transaction, the more likely that transaction is likely to be included in a block quickly.
But EIP-1559’s authors contend this is inefficient, and so have proposed a way for block sizes to adjust depending on the degree of congestion on the network and for a “base fee” that either rises or falls based on existing demand. The adjustment of the block size allows for more transactions at a given time.
“User experience is improved by decreasing the variance and delays waiting for transactions to be approved since miners can adjust to periods of high demand. Fees are easier to estimate because (apart from periods where demand grows quickly) there’s an obviously optimal fee that can be bid to be included in blocks. When there is no congestion, users can always get into the next block with the fixed base fee. If blocks are congested, transaction costs increase rapidly with an increasing base fee, driving the demand down.”
As in the past, included in the London set of EIPs is a fresh delay of Ethereum’s “difficulty bomb” or “ice age” mechanism. This mechanism, if allowed to play out unabated, renders block times on the network incrementally longer and, as a result, makes the network increasingly difficult to use.
Simply put, the bomb exists to incentivize regular updates to the network’s code.
When is all this happening?
There are a few simple ways to monitor when London will actually go live.
First, you can go right to the source and watch the blocks come rolling in.
The activation block is number 12,965,000, according to Ethereum.org. As of the time of the writing of this sentence, Ethereum just added its 12,959,923th block, meaning there are (well, or were) 5,077 blocks to go.
Admittedly, this isn’t a very efficient way to track things.
There are also a handful of Web-based countdown tools, including this one from EtherNodes. The tool currently estimates that activation will happen roughly around 8:30 a.m. ET on August 5, but given how block times aren’t exactly consistent, this time window could shift a bit beforehand.
So, what does all this mean for ETH’s price?
Difficult to say.
There’s been a fair bit of ink spilled about how London is price-positive or “bullish” because it introduces deflationary characteristics to the network. CoinDesk’s Omkar Godbole spoke to some analysts for a piece Wednesday and the collective opinion appears to be “meh” on any immediate market response to London’s activation.
Goldman Sachs’ investor note looked at this “ETH as a deflationary asset” topic and struck a downbeat note.
Here’s what the bank had to say:
“The London upgrade will not make ETH a deflationary asset by default. Mainstream media has long touted the idea that burning the Base Fee, would turn ETH deflationary, thereby making it a more attractive store of value for investors. In order for this to happen, the Base Fee burnt would need to offset the ETH issuance rate (i.e. block reward). Some commentators go as far as comparing the Base Fee burning akin to a share buy-back, which takes part of miner’s revenue and internalizes it. What the upgrade does do is decrease the overall ETH inflation rate, while making ETH itself sometimes inflationary and sometimes deflationary. More interestingly, greater Ethereum network activity will mean more ETH burnt as Base Fee and less ETH for miners to resell in the market, potentially reducing miner selling pressure.
As far as the network’s economy is concerned, Compass Mining’s Will Foxley estimates that due to the fee market changes in EIP-1559 miner income could fall by as much as 30%.
Under the new regime, users can opt to pay a “priority fee,” also known as a “tip,” to miners in order to make their transactions more attractive. However, the base fee paid by users won’t be given to miners — under EIP-1559, it’ll be burnt instead.
Whether the economic shift resulting from London leads to broader changes in the topography of the global cryptocurrency mining ecosystem is tough to predict.
Miners make money when the cost of producing coins is lower than the expense of powering and taking care of these machines, and a steep income drop would likely cause headaches for low-margin operations.
Analysts debate whether Ethereum’s London hardfork is a “sell the news” event
Analysts caution against a potential “buy the rumor, sell the news” pullback for ETH while historical data shows that the price tends to rise following major network upgrades.
Ethereum advocates are bubbling with anticipation over the upcoming London hardfork which is scheduled to take place at block height 12,965,000 on Aug. 5.
Ether rallied from a low at $2,450 in the early hours on August 4 to an intraday high at $2,772 for an 8.2% gain on the day.
One of the most common occurrences in the crypto market is a large price run-up ahead of a major news announcement or protocol upgrade which is subsequently followed by a price dump as those who got in early cash-out to lock in gains and those who were late to the party become bag holders.
Ethereum’s London hard fork has been one of the most talked-about events of 2021 so it would be short-sighted to assume that the price is only going to go up, a point highlighted in the following tweet from Murfski, a pseudonymous analyst on crypto Twitter.
As shown in the chart provided, the analyst cautioned against assuming Ether price would pump above $3,000. According to Murski, if the price managed to hit $3,000, it could quickly be followed by a pullback to as low as $2,000 if the token sells off following the upgrade.
While nothing is certain, the historical trend of price dumps following major developments should not be dismissed despite the bullish price-performance seen from Ether.
Murfski said:
“In my defense, I was bullish at the bottom. As we approach the range highs you better be cautious. Good luck.”
Hard forks have historically been bullish for Ether price
Insight into what to expect from Ether price following the London hard fork can be gleaned from looking at how past upgrades affected the price. According to cryptocurrency analyst Josh Olszewicz, local highs in Eth come an average of 80 days following major upgrades.
$ETH local highs have historically occurred 80 days, on average, after previous hard forks
if London is similar, local high should occur around late October/early November pic.twitter.com/YFtj9L1Kiz
These observations by Olszewicz were further confirmed by crypto economist Ben Lilly, whose detailed breakdown shows that the average returns after upgrades were “5.1% in the following 30 days, 28.8% after 60 days and 64.4% after 90 days.”
Due to this historical performance, Lilly is cautiously optimistic that there are still gains to be had in the future for Ether following the London upgrade.
Lilly said:
“While at first glance a lot of the gains we typically see with Ethereum upgrades might have already played out, I suspect there is still room. This is especially true when we lean on our internal signals, which are hinting at bullishness for ETH. London is definitely a great catalyst event to watch unfold in the coming days to weeks.”
A short-term correction could occur in the short term
According to popular analyst and trader Michaël van de Poppe, there is a possibility of a pullback once the hard fork is implemented.
I’m expecting a short-term top to be happening tomorrow on $ETH.
Healthy correction after EIP-1559 before the heaviest bull run of them all happens.
While van de Poppe expects a short-term correction in Ether price, his long-term perspective for the altcoin is bullish and he predicts that “the heaviest bull run of them all” will come after the pullback.
