London Hard Fork: What It Is and Why It Matters For You
The date is set for the 4th of August, for the long-awaited London hard fork to finally happen on the Ethereum mainnet.
If you are a part of the crypto community, you have probably already heard about the update. If you are wondering what exactly this means for you, here’s what you need to know.
What does the London Hard Fork mean for Ethereum?
The London Hard Fork upgrade is an important step that Ethereum must take, before reaching the final destination of Ethereum 2.0. Right now Ethereum is based on a Proof of Work system, which means that miners preform complex mathematical operations, as a form of verifying the authenticity of the transactions. All the miners compete to be the first to mine a new block on the blockchain. After a miner includes a particular transaction they earn a transaction fee on top of the block reward. Ethereum’s current Proof of Work system can secure around 15 transactions per second, which sounds like a lot (at least compared to Bitcoin, which has less than half of that), but given how popular Ethereum has become, it is showing to not be enough. Right now, in times of high usage, users have to compete in order to secure their spot on the blockchain by paying larger fees, which can sometimes be over $100!
That’s the reason why Ethereum decided to introduce the EIP-1559 model which will be implemented with the London hard fork. EIP stands for Ethereum Improvement Proposal. Developers can create them on their own or include ideas from other users. Anyone can make one and present it to the community, and if the community accepts it, it gets implemented into the Ethereum network. With the new EIP, Ethereum will finally tackle the problem of high and often unpredictable fees, and many see this as leading to Ethereum’s exponential growth and possibly a deflationary effect on ETH.
EIP-1559 model introduces users with a new transaction system, in which instead of the current one, where the users have to compete in order to secure a spot on the block chain by paying higher fees, a base fee is set for each individual block. The base fee will also differ between the block, and if the block is more than 50% full, the base fee will increase, and it will decrease if the block is too empty, incentivizing the network to reach a state of equilibrium in terms of block size. Another addition of this model is that the blocks will double in their gas limit going from 12.5 million to 25 million per block. With this system, all users will have to do, is send their transaction with the base fee, along with an additional miner tip, which is useful in case you need a transaction to go through faster. In case there is a certain amount of money you don’t want to exceed, you will be able to set a fee cap, for the highest amount you’re willing to pay.
It is safe to say that everybody is looking forward to London’s Hard Fork update, well, everybody but miners. This model will greatly decrease their income, because in order to prevent them from conspiring to artificially increase the fee, the entire base fee will be burned, i.e. completely removed from the circulation. Luckily they have made their peace with the core developers through additional EIPs that affect the mining process (but which aren’t directly relevant here) and everything is good to go. As for the deflationary effect of EIP-1559, there’s a reason why I said that many believe it will happen, rather than it being a certainty. The thing is, there will still be a block reward on Ethereum, so ETH will only become deflationary if there is sufficient network usage for the burned base fees to outweigh block rewards.
Don’t get me wrong — in any case, Ethereum will be much less inflationary at least, and the probability of it becoming deflationary (when burning and issuance are averaged out over a longer time frame) is still fairly high. There are different mathematical models to predict whether this will happen, but, speaking from a trader’s perspective, this does seem very likely. DeFi isn’t going anywhere — and this is especially true for DeFi on Ethereum — so it’s not like the network won’t have enough usage. Now that fees will become more manageable (and more predictable), along with the shift in tokenomics, it looks like ETH has a bright future ahead.
How To Trade it
If you’re looking to trade this event though, there are a few main things to keep in mind. First, long-anticipated events like that can be what we call “buy the rumor, sell the news” events, where the big players start selling at the moment the event happens, driving the price down. A typical example of this was the Dogecoin crash: on the day that Elon Musk went on Saturday Night live, new retail traders were buying since they were expecting the price to skyrocket. People that have been around longer, however, saw that this was the worst possible time to buy, and they were right: in a matter of days, DOGE crashed by more than 50%. Now, I’m not saying that something this insane will happen with ETH; unlike DOGE, ETH isn’t a ridiculously overvalued memecoin, but you should still keep in mind that some larger investors might sell the news on August 4th.
Second, if you’ve got a sizable amount of your portfolio in ETH or you want to get more of it, be sure to watch the news around the day when the fork is released. While it’s extremely unlikely for there to be any problems with the code — the fork was already tested extensively on different testnets — there could be some minor difficulty that media sites could spin into a huge FUD story. If this happens, we’re likely to see a news-driven drop of the price. And you know what happens with events like that, especially when the news is insanely overblown? They reverse. Often, very quickly. So be on the lookout for anything that could give you a ridiculously good entry.