Ethereum: London Hard Fork, The Merge and PoS Tokenomics

In this blogpost we explain the EIPs introduced for „London hard fork“, „The Merge“, and Ethereum tokenomics after the PoS consensus mechanism was implemented.
Michael Schranz
Michael Schranz
March 27th, 2023

The London Hard Fork

The London hard fork was a significant and backwards-incompatible upgrade to the Ethereum blockchain that occurred on August 5th, 2021 at block 12965000. It consisted of the implementation of five Ethereum Improvement Proposals (EIPs), which are changes to the Ethereum protocol proposed and approved by the Ethereum (core dev) community.

The five EIPs included in the London hard fork were:

1. EIP-1559: This was the most anticipated and controversial EIP, as it changed the way transaction fees are calculated and managed on the Ethereum network. Under the new system, a base fee is set for each block, which is burned, reducing the overall supply of Ether. This is intended to make transaction fees more predictable and reduce network congestion. It’s very important to emphasise that EIP-1559 does not make gas cheaper! A side effect of a more predictable base fee, EIP-1559 may lead to some reduction in gas prices if we assume that fee predictability means users will overpay for gas less frequently.

2. EIP-3198: This EIP adds an opcode that gives the Ethereum Virtual Machine (EVM) access to the block’s base fee, which is required by EIP-1559. 

3. EIP-3529: This EIP removes gas refunds for the opcode SELFDESTRUCT, and reduces gas refunds for the opcode SSTORE to a lower level where the refunds are still substantial, but they are no longer high enough for current exploits of the refund mechanism to be viable. 

4. EIP-3541: This EIP disallows new code starting with the 0xEF byte to be deployed. Code already existing in the account trie starting with 0xEF byte is not affected semantically by this change.

5. EIP-3554: This EIP introduced a change to the Ethereum difficulty bomb, which is a mechanism built into the Ethereum protocol that gradually increases the difficulty of mining new blocks. The change delayed the onset of the difficulty bomb, which is intended to encourage miners to switch to the new Proof-of-Stake (PoS) consensus mechanism that is expected to replace the current Proof-of-Work (PoW) mechanism in the future.

Overall, the London hard fork was intended to improve the functionality, efficiency, and sustainability of the Ethereum network. It was a significant milestone in the ongoing development of Ethereum and was widely anticipated by the Ethereum community.

The Merge 

previously called Ethereum 2.0 / Serenity or ETH2

The Merge and all upcoming upgrades is a development phase of major upgrades to the Ethereum blockchain network that aims to improve its scalability, security, and sustainability. Ethereum after The Merge upgrade represents a shift from the previous proof-of-work (PoW) consensus mechanism to the new proof-of-stake (PoS) mechanism.

One of the main objectives of The Merge and all the upcoming upgrades is to increase the transaction processing capacity of the network, allowing for more transactions to be processed per second. This will be achieved through a technology called sharding, which will break the blockchain into smaller pieces, or shards, that can process transactions in parallel. This will significantly increase the throughput of the network, allowing for faster and more efficient processing of transactions.

Another key feature of the “new” Ethereum network is the introduction of staking, which allows users to lock up their ether (ETH) in a smart contract in order to participate in the consensus process and validate transactions. This is in contrast to the current proof-of-work system, where miners use computational power to solve complex mathematical problems to validate transactions and receive rewards. The move to a proof-of-stake system has several benefits, including reducing energy consumption and lowering the barriers to entry for users to participate in the consensus process. This will also make the network more secure, as it will be harder for bad actors to gain control of the network. The shift of Ethereum towards PoS has been rolled out in phases, with the first phase, known as the Beacon Chain, launched in December 2020. The subsequent phases introduced additional features, such as sharding and smart contract functionality…

Ethereum PoS Tokenomics 

As we now know, the change to Proof-of-Stake introduced several significant changes to the tokenomics of Ethereum, including the following:

1. Proof-of-Stake: Ethereum replaced the Proof of Work (PoW) consensus mechanism with Proof of Stake (PoS). Validators are chosen randomly by the Ethereum protocol to propose blocks, and only one validator can propose a block for each 12-second slot. They are then responsible for validating transactions and blocks on the network in exchange for rewards. All validators stake the same amount of 32 ETH.

2. Staking Rewards: Validators in Ethereum earn staking rewards for participating and securing the network. These rewards are generated through inflation, with a target annual inflation rate of around 1-2% of the total ETH supply. Validators also earn a share of transaction fees on the network.

3. Shard Chains: Ethereum will introduce a concept called shard chains, which are independent chains that run in parallel to the main Ethereum chain. These shard chains allow for increased scalability and improved performance on the network.

4. Beacon Chain: The Beacon Chain is a new consensus layer that serves as the backbone of Ethereum PoS. It manages the PoS consensus mechanism and will coordinate the shard chains if implemented as planned.

Overall, the tokenomics of Ethereum PoS are designed to increase scalability, security, and efficiency on the network while maintaining a fair and decentralized distribution of rewards.