The Ethereum ecosystem has the advantage of having the largest and most active developer community in the crypto world. Having a community as large as that of Ethereum aids in developing ground-breaking innovations. These innovations are brought in through Ethereum Improvement Proposals (EIPs). This article introduces you to them and tells you how the large number of participants on the network come to a consensus about each of them. We’ll also look at some top upgrades that have helped Ethereum become where it is now—on the brink of the Shanghai upgrade.
To begin with, let’s remember that forks are essentially code updates. And a code update is what causes an upgrade, of which there are two main types—hard forks and soft forks
When changes are drastic, the blockchain network may split. So there are two blockchain networks in the end. This type of upgrade is known as a hard fork. When hard forks occur, the community divides into two—one supporting the pre-split version of the chain and the other the new version.
Some hard forks are intentional, while some are contentious. The latter often leads to a market shake-up. The Bitcoin Cash hard fork is an example that comes to mind.
Unlike the hard variety of forks, soft forks do not require a split as they are backward compatible. So users may choose to implement the update without it causing any split. When people talk about upgrades, they often think of hard forks. But soft forks have a vital role to play concerning the development of the chain.
You may have noticed that Ethereum’s recent “hard forks,” like the Ethereum Shanghai upgrade, do not result in a split in the chain. That’s because they are soft forks. The term hard fork is primarily used for public messaging to foreground the impact of these upgrades.
Ethereum soft forks are implemented via EIPs and ERCs. The journey from an EIP to an ERC leads to a soft fork like Shanghai, so let’s find out what these terms mean.
The journey of EIP to ERC
Ethereum’s EIPs are like the Bitcoin Improvement Proposals (BIPs) of the world’s largest crypto by market cap. (BIPs are, in turn, modeled after Python Enhancement Proposals or PEPs). They have the same purpose as BIPs. That is, bringing in innovation through upgrades. EIPs are how decisions regarding upgrades are made on the blockchain. These proposals are put to the vote.
If approved, the proposals lead to the creation of an Ethereum Request for Comment or ERC. An ERC means a new standard is established through an upgrade. All the project files and revision history is stored on a GitHub repository.
There are five stages through which an idea or an EIP leads to an ERC. They are as follows.
1. Idea or discussion thread stage
Developers working on Ethereum blockchain developments first initiate a discussion thread on the Fellowship of Ethereum Magicians. The purpose of initiating this thread is to avoid overlap with existing proposals or standards.
If the proposal is original and useful, feedback is sought and documented as an EIP.
2. Draft stage
The documentation must include the technical specifications, features, and the rationale behind the proposal. While drafting the proposal, the author can create a pull request. Doing this allows them to submit contributions to an open development project. They then invite editors and reviewers to provide feedback.
The editors will also guide the authors regarding the standard processes. They will later change the proposal’s status to draft if it meets the guideline specifications.
3. Review stage
After editors and reviewers vet the draft proposal, authors are asked to continue auditing it. They must also document any foreseeable insights for future use cases. In this stage, the EIP moves from the draft to the review stage and is brought to the developers and community.
4. Last call
Once the author of the EIP is confident that no more changes are required, they raise a final pull request. This move brings the EIP to the final stage. At this point, the editors take a last call on the proposal and fix a deadline for the community to make suggestions. Beyond this date—usually, in about two weeks—no changes will be entertained. However, the proposal returns to the review stage if any significant changes are needed.
5. Final stage
After the last call period, the author creates another pull request to change the status of the EIP to indicate that it is ready for deployment. Once deployed to the mainnet, the EIP transforms into an ERC. The standard number usually follows the name of an ERC. For example, ERC-1155 or ERC-1559.
Currently, there are over 5000 EIPs. Many of these proposals have been incorporated into the protocol, bringing many positive changes into effect. The list of all the ERCs can be found here.
Top five EIPs and ERCs
Many EIPs and ERCs, including the ones concerning the Merge, have played a key role in changing Ethereum’s course over the years. Here is our list of the top five.
1. ERC-20 token standard
Vitalik Buterin and LUKSO founder Fabian Vogelsteller proposed EIP-20 five months into the launch of the Ethereum mainnet in 2015. It made the creating and issuing of smart contracts possible on Ethereum. ERC-20 also set the standard for fungible tokens like ETH—including their transfer and spending by third parties.
Many token standards have been introduced over the years, but ERC-20 was the one that set the bar. Most tokens today use it as a template, making it one of the most significant upgrades.
2. ERC-721 NFT standard
In 2018, William Entriken, Dieter Shirley, Jacob Evans, and Nastassia Sachs introduced an EIP-721. The standard it introduced was added to the network in the same year. It addressed the limitations of ERC-20 by introducing the concept of non-fungibility. That means tokens would be given unique identities, so they can be used to represent unique items. In other words, they enable the creation and transfer of Non-Fungible Tokens or NFTs.
This standard works by introducing a framework that allows ETH wallets to receive, track, and transfer NFTs and perform other applications.
ERC-721 enabled the creation of a new market, expanding the use cases of crypto. It also laid the foundation for the metaverse.
3. ERC-1559: Change in fee burning mechanism in ETH 1.0 chain
The ERC-1559 change was the most discussed upgrade of all time. The reason for it being so contentious was that it aimed to change the tokenomics of ETH. That means it altered ETH’s supply in the market. Proposed in 2019 and implemented in 2021, it is one part of the London hard fork.
ERC-1559 essentially introduced a fee burning mechanism. That means it eliminated the guesswork of gas fees by introducing a block-wise base fee that one could calculate in advance. But why was it even required?
Well, a few years ago, the core team decided to reduce Ethereum’s block rewards. That meant miners would not receive 5 ETH anymore. They would have to make do with 2 ETH. When that happened, miners began to up their gas fees to compensate for the decrease in earnings. This led to network congestion. That meant transactions with lower gas fees would take very long.
The ERC-1559 ensured Ethereum had made some significant fundamental changes to the fee mechanism. Before it was implemented, the reward consisted of the block reward and the transaction fee. With ERC-1559, the transaction fee paid in ETH is burned permanently instead. So, the miners now only got block rewards thereafter. (Now, this is staking rewards.)
So, to sum it up, ERC-1559 decreased the supply of new ETH in the market.
4. ERC-3675: PoS upgrade
ERC-3675 can be regarded as a noteworthy upgrade in the life of Ethereum. The upgrade was proposed in mid-2021 and implemented on 15 September 2022. The proposal by Vitalik Buterin, Danny Ryan, and Mikhail Kalinin specified a change in a block structure, block processing, fork choice rule, and network interface. These changes facilitated the transition from the Proof-of-Work to the Proof-of-Stake consensus mechanism.
The mechanism change had been discussed for a long time, but EIP-3675 set the idea in motion.
5. ERC-1155: Multi-token standard
The ERC-1155 standard was built on the ERC-721 token standard. Its specialty was that it allowed the creation of both non-fungible and semi-fungible tokens via a single, smart contract. Before this, two smart contracts with different token standards would be necessary.
ERC-1155 set the stage for developing blockchain-based games, which need coins and collectibles.
This EIP was the brainchild of Witek Radomski, Andrew Cooke, Philippe Castonguay, James Therien, Eric Binet, and Ronan Sandford. It was also proposed in 2018.
Over the years, through integrating many small EIPs, Ethereum has become the most versatile crypto. And Ethereum Shanghai upgrade marks the conclusion of an extremely challenging milestone—the migration from PoW to PoS. As the second-largest crypto by market cap begins the next phase in its evolution, it may be worth keeping track of its upgrade history. Read this to learn more about Ethereum’s pre-Shanghai forks.
What is the next upgrade for Ethereum?
The coming upgrade, known as Dencun (a mashup of “Cancun” and “Deneb”), will be more incremental. It has two goals: to reduce transaction fees on the Ethereum blockchain and to increase the network’s throughput. In short, it will help Ethereum to run faster and cheaper, and that’s certainly worthwhile.
How will the Ethereum Shanghai Upgrade impact investors?
After the Shanghai Upgrade, we have seen a surge of positive momentum around the price of Ethereum. However, most cryptocurrencies are trading positively due to mildly encouraging US inflation data. Nonetheless, if the entire supply of staked ETH is withdrawn and sold, there may be increased volatility ahead.