October 1, 2022

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What Are The Pros and Cons Of The Ethereum London Upgrade?

On Thursday, August 5th, the Ethereum cryptocurrency network went live with its “London” update,” one...

On Thursday, August 5th, the Ethereum cryptocurrency network went live with its “London” update,” one of the most significant updates in the history of the world’s number two cryptocurrency. The new update includes many new features that have significant implications for those holding Ethereum or those who are involved in mining it. What Are The Pros and Cons Of The Ethereum London Upgrade? 

Pro: The transaction price for Ethereum mining should be more stable

One of the most significant hurdles facing Ethereum miners is that the fees associated with carrying out transactions on the Ethereum network have been prone to excess volatility and wild fluctuations. This is primarily because before the London update Ethereum’s transaction fees (known in the community as “gas prices”) were determined by blind bidding. Because it could be very difficult for users to predict what the transaction fees would be at a given time, those who needed transactions carried out promptly would be forced to bid very high.

The London update includes features designed to resolve this issue, namely the inclusion of an algorithm that sets a “base fee”, determined by what the demands of the network are at a given time. This should eliminate any need for users to bid excessively high to guarantee a transaction would take place by making the price more predictable and should reduce the overall volatility in prices which will now be determined by supply and demand only.

Con: Price changes do not necessarily mean lower prices

While the changes to the bidding system and introduction of base fees mean that the volatility of the prices will go down, this is oriented more towards making the Ethereum network more user-friendly rather than less expensive. The prices will still be determined by supply and demand and the overall costs should remain about the same over time.

Pro: Changes to block size should alleviate demand problems

In addition to changes to how pricing is determined the London upgrade also made a change to the capacity in each block. The block size for the Ethereum network has been doubled, and while this theoretically means double capacity for transactions, the protocol has been amended to only attempt to fill the block about halfway with some wiggle room. The effect of this is that while the number of transactions per block should remain roughly the same, the extra space will serve as a hedge against spikes in demand. This should have the effect of smoothing things out so that brief periods of high demand will not drastically increase transaction fees or limit the ability to accommodate transactions.

Pro: In theory “Burning” of Ether could raise prices

Another major change being made with the London upgrade is that now when transactions are being executed, a fraction of the ether involved will be permanently destroyed rather than recycled back into general circulation. The rationale behind this change is that if the Ether cryptocurrency is simply being generated non-stop, eventually the increase in supply will reach the point where it becomes worthless. Destroying some with every transaction is designed to exert some deflationary pressure on ether and make it a more attractive investment because the price should rise as the supply decreases.

This is a critical concern among investors who have been recently somewhat concerned about the possibility of inflation and are looking for investment opportunities to hedge against it. 

Con: In practice, it isn’t actually clear that the changes will drive prices up

While the burning of Ether with transactions is being framed as a mechanism to reduce overall supply and increase the price of the cryptocurrency, there is some doubt as to whether that will actually be what happens. The changes that are being made are not necessarily significant enough to offset the creation of new cryptocurrency unless transaction fees are excessively high, something that the pricing updates seek to prevent in the first place.

It is plausible that during periods of very high intensity that more Ether will be destroyed than created but this is likely to be the exception rather than the rule. In practice, the change will likely be more suited to keeping the inflation of the cryptocurrency under control in the long run. Regardless, the mere idea that there is a control in place to prevent inflation from spiraling out of control will likely increase investor confidence in Ether.

Pro: The groundwork is being laid for a radical transition in how blockchain currency works

While it will not result in any immediate effect for the Ethereum network, the London upgrade is making changes to the code that will pave the way for a long-anticipated transition to Ethereum 2.0, which has been in development for several years. This transition has massive implications, primarily because it will completely change the mechanism by which transactions are carried out and ether is generated.

Currently, Ethereum operates using what is known as a “proof of work” model, which utilizes computing power to solve complicated equations to validate transactions. Ethereum 2.0 will instead use what is known as a “proof of stake” model which instead requires users to validate transactions using existing Ether as collateral. This is a complete and fundamental overhaul of how cryptocurrency works and may set the stage for similar transitions among other cryptocurrencies as well. 

Pro: A lower carbon footprint

Another benefit of eliminating computer-based mining: a much lower carbon footprint for the industry. This should dramatically lower the electricity used to make the Ethereum network operate and effectively eliminate one of the harshest criticisms currently being levied at the cryptocurrency industry in addition to some of the overhead costs involved.

Con: Ethereum 2.0 represents a looming cliff for Ethereum miners

Of course, the transition from proof of work to proof of stake has a huge negative consequence for the ether mining industry, namely that it will completely invalidate Ether mining altogether. Once Ethereum 2.0 is live and the transition is complete it will no longer be possible to mine ether at all, effectively making the whole industry built up around mining Ether obsolete. While it can certainly be argued that this is a necessary step forward in the cryptocurrency industry it is clearly a negative for those who have built a livelihood around the practice.

All in all, the London update represents the most significant change for Ethereum yet and will be laying the groundwork for even more updates and upgrades, with all of the costs and benefits that come with them.

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