The Ethereum network saw the launch of its London upgrade to the Ropsten testnet on June 24th. This upgrade includes the highly anticipated Ethereum Improvement Proposal (EIP) 1559.

After the start on the Ropsten test network, the London upgrade will be rolled out at weekly intervals on the Ethereum test networks Goerli, Rinkeby and Kovan. This is one of the most important steps in the roadmap to implement the Proof-of-Stake (PoS) consensus in the Ethereum network, also known as Ethereum 2.0.

The London upgrade brings 5 ​​EIPs deployed on test networks – EIP-1559, EIP-3198, EIP-3529, EIP-3541 and EIP-3554. The hotly debated proposal EIP-1559 is a transaction pricing mechanism that includes a fixed line fee for each block burned and allows for dynamic scaling and shrinking of block sizes to solve the problem of congestion.

Through this mechanism, a separate basic fee is charged for the transactions that are included in the next block. For applications and users who want to prioritize their transactions on the network, a trick called a “priority fee” can be added to incentivize miners to get in faster. While the miners pocket this tip, the base fee for the transaction is burned. This requires that by the time the transition to the PoS model is complete, in addition to the 2 ethers (ETH) per block that miners receive, they also receive a tip on how to prioritize transactions.

James Beck, Director of Communications and Content at ConsenSys – a blockchain technology company that powers Ethereum’s infrastructure – discussed with Cointelegraph about the impact of base rate burning on the network:

“Basic combustion will put deflationary pressures on ETH emissions, although modeling the extent of deflation accurately is difficult because you have to predict variables such as expected transactions and it is even more difficult to predict that network congestion is expected. Theoretically, the more transactions take place, the greater the deflationary pressure that the basic fee burn exerts on the entire Ethereum offering. “

However, Marie Tatibouet, Marketing Director of the Gate.io crypto exchange, spoke to Cointelegraph about the possibility that this change in transaction fees could adversely affect the network.

Noting that you can still tip miners and that the higher the tip, the faster the transaction will be processed, she added, “Now that the network is getting bigger and Ethereum continues to be the premier smart contract platform, Is not it? start a “fee war” between users willing to pay extra to speed up their transactions? “

Delayed bomb difficulty

Another important part of this upgrade that will affect everyday users is EIP-3554. This EIP delays the entry into force of the “Difficulty Bomb” from the first week of December 2021. Essentially, the difficulty that the bomb detonates means that the mining of a new block becomes extremely signal chain.

Kosala Hemachandra, founder and CEO of MyEtherWallet – an Ethereum-based wallet platform – told Cointelegraph that the EIP has been there since the birth of Ethereum to ensure the network moves to PoS and Eth2 in a timely manner. He added:

“This value is responsible for the fact that the block difficulty becomes exponentially difficult after a certain number of blocks, making it impossible for miners to mine new blocks and have to switch to the Eth2 network. However, due to development delays, this time bomb is being delayed further and at the London hub it will be postponed one last time. “

The official document for this EIP states that the network “seeks the Shanghai upgrade and / or consolidation before December 2021”. However, it was also added that the bomb could be reset or removed altogether at this point, suggesting that the first week of December was not a tough date for the bomb. This or the final merger is taking place and may be delayed even further from that point on.

Tatibouet also mentioned that until the merger of Ethereum 1.0 with the PoS Beacon Chain – a mechanism for coordinating shards and shards in the network – transaction speed solutions built on top of the existing network, or second-class solutions, appear to be the most viable option.

She added, “Layer One and Layer 2 solutions don’t have to be mutually exclusive. For this reason, Ethereum 2.0 uses a combination of layer one (sharding, PoS) and layer two (roll-up) to achieve real scalability. “

Related: London Tour Guide: What EIP-1559 Hard Fork Promises for Ethereum

Coincidentally, according to information from CryptoQuant, more than 100,000 ETH were included in the Eth2 deposit contract on the same day as the upgrade implementation on the Ropsten testnet, which corresponds to a nominal value of 210 million US dollars at the current ETH value. Such a high level of interest could point to the expectation the Ethereum community has for this upgrade, especially given the much discussed impact of EIP-1559.

Hemachandra also discusses how this proposal supports Layer 2 solutions. He added, “EIP-1559 introduced dynamic mass gas limitation. In essence, the number of transactions that can be included in a block can now be automatically adjusted to the congestion. “He added,” So it can reduce congestion – this is another great solution on L2. “

Incidents and consequences of the “merger”

It is important to note that after an additional 100,000 ETH were staked on the testnet on the day of the London upgrade rollout, the total percentage of ETH staked on the beacon chain topped 5% for the first time. The amount of ETH staking is currently just over 6 million tokens valued at 12.76 billion US dollars.

Compared to other PoS networks and coins, 5% ETH use is not a high percentage. Cardano, for example, currently has nearly 72% of ADA on the network. However, there are many reasons why this is so. Hemachandra explains the main reason and why this is a positive sign for the network:

“Unlike most other PoS coins, the purpose of ETH is not just to make and generate profits. This is a good sign that ETH is being used as a utility. For example, if 80% ETH is staked out, there is only 20% ETH left to do something in Ethereum, and I don’t think that’s an ideal scenario. “

According to data from Anthony Sassano, co-founder of EthHub.io, 23% of all ETH minings are stored in smart contracts. This equates to over 23.45 million ETH tokens valued at nearly $ 50 billion. Out of 23.45 million, more than 6 million ETH are placed in Eth2 deposit contracts and 9 million ETH in various Decentralized Financial Protocols (DeFi) as the network is most commonly used for DeFi.

The remaining ETH in smart contracts is divided between various stakeholders such as Gemini, Gnosis Safe Multi-Signature Wallet, Polygon Bridge and Vitalik Buterin’s Cold Wallet.

After the “merger”, which will combine both Ethereum 1.0 and Ethereum 2.0 and mark the end of Ethereum’s proof-of-work consensus mechanism, the ETH miners are faced with a difficult decision.

If their mining hardware is out of date, they will have to sell their devices and switch to staking from ETH or – at least for GPU miners – to other altcoins.

An analysis by Justin Drake of the Ethereum Foundation estimates that 1,000 ETH are released and 6,000 ETH are burned every day to make ETH a more deflationary asset.

His analysis further shows that assuming an increase in validators and an annual staking percentage of 6.7%, the annual supply change would be minus 1.6 million ETH, reducing the annual supply rate to 1.4%.

This transformation will make ETH a deflationary asset as the supply ratio shrinks over time, putting increased pressure on the supply-demand dynamics that determine its price in the marketplace.