On August 5, 2021, the Ethereum mainnet at block #12965000 saw the London hard fork, the next step on the path to Ethereum 2.0. It had previously been activated in the test networks Ropsten, Goerli and Rinkeby, and even then triggered a full spectrum of industry emotions—from elation to hatred. Investors expected that with London’s activation ETH tokenomics would become deflationary, and that would lead to higher prices. Miners, however, feared a 20-30% drop in revenue.
ForkLog examines whether those expectations and fears were borne out.
What happened in London?
The London hard fork consisted of five Ethereum Improvement Proposals: EIP-1559, 3554, 3529, 3198 and 3541.
The most important of them was EIP-1559 — it radically changed the model for determining transaction fees. It was proposed by Vitalik Buterin back in 2019, but its adoption was repeatedly postponed due to controversy.
Instead of the initial auction-based fee model, a ‘base fee’ (basefee) was introduced—the minimum payment that allows a transaction to be included in a block. The base fee is recalculated each block based on network utilization and can rise or fall by as much as 12.5% per block. This provides greater predictability of fees and smooths their fluctuations.
Also EIP-1559 provides a doubling of the maximum gas limit per block — from 12.5 million to 25 million, effectively doubling the maximum block size. The target block utilization is set at 50%. When this metric rises, the base fee increases, forcing users to reduce the number of transactions. For users who want faster processing, there remains the option to pay a priority fee or ‘miner tips’.
The most controversial change in EIP-1559 is that the entire base fee is burned, while miners receive only the priority fee. In this way, developers aimed to create a self-regulating mechanism that limits issuance and reduces ETH inflation, without compromising network security.
Ultimately, ordinary users of DeFi applications should benefit from EIP-1559, as the update is intended to shield them from unpredictable fee spikes and overpayment for gas.
Did miners suffer?
Before the hard fork, miners’ revenue came from block rewards (2 ETH per block) and transaction fees. In spring 2021, at the network’s peak traffic, fee income was close to parity with the block reward, and in February it even surpassed it. Even during periods of low gas prices, fees accounted for at least 10-20% of miners’ total revenue.
EIP-1559 fundamentally altered miners’ income mix. The majority of transaction fees are now burned. Miners receive only the relatively small ‘tips’. According to WatchtheBurn.com, the share of the priority fee varies by block from 10% to 100% of the base fee, but on average it is around 20%.
According to WhatToMine, two hours before the fork a mining farm with 90 MH/s hash rate mined about 0.002569 ETH per day (excluding electricity costs). A few days after the fork, mining fell to 0.00209 ETH per day. Thus, expressed in ETH, miners’ revenue declined by about 18%. However, thanks to a rise in price in USD, miners are now earning roughly as much as before the fork.
MEV as compensation for miners
Even in early 2021, as the inevitability of EIP-1559 and the drop in transaction fees became evident, large mining pools began seeking ways to compensate for the revenue drop.
One such solution was Miner Extractable Value (MEV) — ‘miner-extractable value’. MEV refers to profit-extraction methods miners can exploit thanks to access to a pool of unconfirmed transactions. A miner can include, exclude, or reorder transactions in the blocks they produce, opening broad opportunities for arbitrage and front-running.
Analysts already call MEV an invisible tax that miners can collect from users. For example, a miner can deliberately trigger price slippage on AMM-based decentralized exchanges by prioritizing their transactions over those of regular users. Using front-running leads to user orders being executed at artificially inflated prices, and the miner earns a small profit on each trade.
Most notably, this is no longer theoretical; in March 2021 the Ethermine mining pool from Austrian BitFly, which controls about 20% of Ethereum’s hash rate, introduced an MEV-arbitrage strategy. About 80% of the extracted profits are distributed among pool participants.
Its example was soon followed by others. For instance, the 2Miners pool announced it would use ArcherDAO’s MEV solutions. Independent analysts note that by April 2021 up to 30% of Ethereum blocks contained MEV-related transactions.
Likely by now, a significant portion of the top-10 mining pools and large solo miners employ MEV solutions, for example the popular MEV-Geth flash bot.
MEV tools potentially can extract millions of dollars of profit from the market and users’ wallets per day, and popular DEXs have no effective ways to counter them. For example, the Gnosis Protocol project is currently only testing MEV-protection technology on the new DEX CowSwap.
The last breath of gas tokens?
Proposal EIP-3529, included in the London fork, threatened the disappearance of services that offered to reduce transaction costs by using gas tokens. You would buy them when gas prices were low and use them to pay for transactions when the network was busy and gas prices were high. Typically, their use could cut transaction costs in half.
GasToken variants were among the first: GST1 and GST2, which could be used with any DeFi platform on Ethereum. In June 2020, popular DEX aggregator 1inch Network issued Chi GasToken (CHI), which could be used only on that platform.
These services exploited the gas refund feature that rewarded developers for removing data from the Ethereum blockchain along with unused smart contracts. When gas prices were low, the services filled the network with ‘garbage’ data, and when gas prices surged again, they removed their garbage, for which they received compensation.
Proposed EIP-3529 repeatedly reduced the maximum gas refund, rendering the economics of gas-token use in Ethereum moot.
The fork that didn’t happen
One concern about the London upgrade was that a significant portion of miners and node operators would not support the unfavorable hard fork and would continue to operate without activating the updates. In that scenario, the network could have split into two blockchains, as in 2016 when Ethereum Classic was born after not embracing a proposed hard fork by the Ethereum Foundation.
Some crypto exchanges (for example, Binance) warned their users about this possibility and even prepared to airdrop forked coins. But just two hours before the London hard fork, according to ethernodes.org, more than 70% of nodes were ready. Support for the upgrade by the majority of network participants was assured, and there were no grounds for a split of the Ethereum blockchain.
From London to Shanghai
London fulfilled all the tasks assigned to it by developers, including the most complex — changing the mechanism for calculating transaction fees.
In late 2021, another hard fork is planned, which is expected to bring the final move toward Ethereum 2.0. It has already been named Shanghai, but its contents are still under discussion within the developer community. Most likely, the final list of proposals will be approved in October, followed by activation in test networks.
For everyday Ethereum users and long-term investors, the events and planned changes are positive in every respect. Network throughput is expected to rise many times over, transaction costs will fall, and the supply reduction toward deflation could spur price appreciation. As for miners, their prospects are not bright: in five months they will likely have to switch their hardware to mining other PoW-cryptocurrencies (ETC, ZEC and others) that are unlikely to be as profitable as Ethereum has been in recent years.
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