A major UPGRADE of Ethereum is going to be activated when the block height reaches 7,080,000. Estimated date, based on the average block time of 15 seconds, is slated to be around 16 Jan 2019. The current block height at date of writing (5 Jan) is around 7,013,669. We have approximately 11 more days before witnessing this giant leap forward in the development of Ethereum.
To start off, Ethereum is divided into 4 phases, Frontier, Homestead, Metropolis and Serenity. We are currently in phase 3 of Metropolis. There are two releases within Metropolis: Byzantium which already happened in late 2017 and Constantinople which is the 2nd release happening in less than 2 weeks.
A hard fork is basically just a protocol upgrade. Its like an upgrade of our computer operating system or phone software system to improve the features and functionalities. Normally a hard fork occurs when there are 2 opposing community, miners, developers with different ideals and opinions on how things should be done. This results in a split from the blockchain and a derivative would be created from the original token.
Bitcoin Hard Fork
One perfect example is the bitcoin hard fork. Bitcoin faced scalability issues as it could only do 7 transactions per second. One group of people believes that the best way to solve this is simply to upgrade the block size of BTC to 8 MB. Initially Bitcoin only has block size of 1 MB to store all transaction, which of course leads to heavy congestion and transactions delay.
Another group of people believes that no this is not the best way. Increasing block size to 8 MB stands against the principle of decentralization. If more transactions can be stored in a block, there will be lesser blocks to mine and small miners would go out of business as they can’t compete against big miners. Eventually, Bitcoin nodes would reduce and power would be centralized among the big mining players.
Instead, what they propose is to upgrade Bitcoin to a block size of 2 MB and reduce the size of each transaction by removing the signature portion which takes up 60% of data in Bitcoin’s script. That’s why this proposal is called Segwitx2. (Segregated witness + x 2 MB block size increase)
Bitcoin hardfork happened in 2017 where BTC is splitted between 2 different communities, (BCH) Bitcoin Cash and (BTC) Bitcoin with Segwitx2. Later in 2018, Bitcoin Cash got into another civil war and forks among BCH community, which i did not bother to read up anymore.
Ethereum Hard Fork
Ethereum also previously had a hard fork in 2016 when its DAO was hacked, but we will not go into that and you can read more about it here if you are interested. This time round in 2019, whats different from other hard forks is that there is a general consensus and everyone agrees on this update. It was not because of a divided split in ideal or anything. A general consensus means almost all nodes in the Ethereum network would upgrade to the new blockchain and follow the newly improvised rules and logic of the code.
So what’s in this “upgrade” for Ethereum? There are 4 main Ethereum Improvement Proposal (EIP) upgrades which would be included into Ethereum after the hard fork. I think this video provides the best explanation and summary on the Constantinople hard fork.
Bitwise shifting in EIP 145 results in cheaper cost of gas when lines of codes in smart contracts are executed. Verifying hash of smart contract in EIP 1052 introduces a more efficient way of verifying another smart contract without going through every single line of codes. Both EIP 145 and 1052 improves network efficiency in Ethereum network and allows for cheaper, faster transactions to pass through.
What is Bitcoin’s Lightning Network?
EIP 1014 is like Bitcoin lightning network, one of the solutions to increase scalability of transactions. The idea of lightning network is that NOT every single transaction has to be recorded in every block. There are some transactions that are small, regular and voluminous. To reduce the network load, these transactions can be settled “off-chain” and ONLY the final settlement is broadcasted to the bitcoin network.
If Alice wants to buy coffee from Starbucks every morning using bitcoin, she can open up a payment channel with Starbucks. A ledger is set up between Alice and Starbucks indicating how much BTC should Alice be paid and how much BTC should Starbucks be paid.
Alice would first put in a deposit, e.g. Alice gets 10 BTC, Starbucks get 0 BTC. When she buys a coffee which costs 0.5, the ledger would be updated to Alice gets 9.5 BTC, Starbucks get 0.5 BTC. Assuming Alice buys 10 coffee from Starbucks by end of month, the ledger would be updated to Alice gets 5 BTC, Starbucks get 5 BTC. This ledger or transaction would then be submitted to the network for bitcoin miners to validate. Hence, only the final transaction is stored on the blockchain.
Economics of Bitcoin and Ethereum
The first hard fork during the Byzantium release reduces ETH reward of miners from 5 to 3. The proposal in EIP 1234 seeks to further reduces ETH reward of miners from 3 to 2. Theoretically, this would reduce inflation rate and drive ETH price upwards as the total supply of ETH decreases.
Its similar to Bitcoin economics where the reward for bitcoin miners is halfed every 4 years. When bitcoin was first created in 2008, each miner gets 50 BTC for every block mined, 2012 it becomes 25 BTC, 2016 becomes 12.5 BTC and we are going to see the next bitcoin halving in 2020. The main reason for this is to keep inflation under control as there is only a finite supply of Bitcoin (21 million).
This scarcity effect can be likened to gold where every gram of gold mined reduces the total supply of gold globally. This is what gives gold value and why its commonly known as a safe store of value against inflation. This is in contrast with what we have seen in fiat where US Treasury is allowed to print money and increase circulating supply thus leading to inflation and devaluation of currency.
Ethereum’s Ice Age and Diffculty Time Bomb
The last point is on Ethereum’s difficulty time bomb or the Ethereum ice age. Why is there a difficulty time bomb and whats an ice age? The first thing to note is Ethereum is currently using Proof-of-Work consensus algorithm to mine blocks in the network. Its end goal is to transition from proof-of-work to proof-of-stake where miners become validators to validate transactions. There will be no more mining rigs and factories that consumes tons of electricity anymore when Ethereum reaches its last phase, Serenity.
In order for this to happen, a code was added to Ethereum in 2015 which makes difficulty of mining increase exponentially. This creates pressure developers to work towards proof-of-stake as well as miners to upgrade their nodes to the new Ethereum blockchain. Eventually, the difficulty of mining would become so hard that miners would not be profitable if they stayed on the old chain. Hence, everyone would be forced to move on to Serenity and there won’t be a split in community. The old blockchain would become too difficult to mine and eventually its whole network would stall. Hence the term “ice age”.
Technical Analysis of Ethereum
All in all, this upgrade is going to see improved network efficiency, faster throughput transactions, lower GAS cost to run smart contracts and layer 2 solutions like plasma. Let’s take a look at the technical chart of Ethereum.
Yes. Incoming Kumo Breakout. But Chikou Span has not broke out of Kumo cloud yet. Remember the principle of going long in the previous Ichimoku post? Price must be above cloud, Chikou span breakout, cloud ahead must be green and TK crossover above cloud. Let’s zoom in and have a closer look.
The most obvious observation is that long flat kumo right there at 210. Personally, I would wait for price to break above 210 before going long on ETH. If price manages to cut through that resistance line, all the conditions of going long would have been met. Chikou Span would be above cloud, TK crossover above cloud, price above cloud and forecasted projections would be green. If you are like me, a believer of Ethereum, smart contracts and future of blockchain, 210 is the entry price level you can look out for. But of course I am basing my judgement on Ichimoku Cloud, you might have other technical indicators that provides different entry signals. Please DYODD before investing in Ethereum!