Ethereum is about to get a big upgrade. Here's what you need to know.

Ethereum, the third-largest cryptocurrency by market cap and the most popular platform for decentralized applications (dApps), is getting an upgrade on (roughly) Jan. 16.?

The upgrade is called Constantinople and it makes the Ethereum network a bit more efficient, paving the way for bigger changes further ahead. It also brings some important changes for miners on the network.?

Here's an overview of what, exactly, is happening, and the steps owners of ether should undertake ahead of the fork.?

The answer to the second question is really easy: There's no need to do anything. The upcoming upgrade, while technically a fork, will very likely be non-contentious, meaning there's no disagreement on whether it should happen. This means Ethereum won't split into two separate coins next Wednesday. If everything goes well — and chances are good that it will — your ether holdings will be exactly the same before and after the fork, regardless of whether your ether is located on a private wallet or an exchange.?

And no, ether holders will not be getting a new coin; if you see info about it anywhere, it's either a scam or a mostly-irrelevant project that's just trying to get some attention out of the confusion that surrounds every cryptocurrency fork (which is why I'm primarily calling Constantinople an upgrade and not a fork).?

Ethereum node operators and miners will have to update their software ahead of the upgrade; the links can be found here.?

Note that the January 16th date for the upgrade is approximate. The upgrade should happen when block 7,080,000 on the Ethereum blockchain is mined, which is currently approximately Wednesday, Jan, 16, 8pm UTC, but the exact time will shift a little as new blocks aren't always found in the same amount of time.?

Paving the way for a faster future

With that out of the way, there are still a few things you should know about this upgrade.?

Constantinople consists of five Ethereum Improvement Proposals (EIPs), which are documents explaining a new feature or change in Ethereum's code. Explaining them in detail might be a bit too technical for most users, but here's an overview of the most important changes they bring.

Four of the EIPs — EIP 145, 1014, 1052 and 1283 — describe various technical improvements, which make Ethereum a bit more efficient, cheaper to use and pave the way for future upgrades. In short, they're nice, they're needed, but they're not something the vast majority of users will notice in day-to-day usage.?

EIP 1014 is worth singling out as it makes it possible to interact with Ethereum addresses that haven't yet been created. This is important as it will be used for so-called state channels, which will (hopefully) be an important scaling solution for Ethereum, allowing certain transactions to happen on a separate blockchain. Remember how Cryptokittes ground down Ethereum to a halt? Well, thanks to state channels, games like Cryptokitties will be able to live on Ethereum without slowing it down.?

From PoW to PoS

The fifth EIP, 1234, brings two major (but closely related) changes. One reduces the reward for mining Ethereum, and the other delays the so-called "difficulty bomb," a mechanism that forces Ethereum to upgrade to a completely different mode of operation called proof-of-stake (PoS).?

Ethereum, like Bitcoin, is a blockchain-based platform with a proof-of-work consensus mechanism. That means that blocks with all the transactions on the networks are confirmed by miners, which employ computing power to solve a math puzzle with ever-increasing complexity. This makes it quite hard (though not impossible, as seen from the recent attack on Ethereum Classic) to alter Ethereum's blockchain, but it's also wasting a tremendous amount of energy.?

Image: Flickr/Cryptocurrency360.com

Unlike Bitcoin, Ethereum's plan from the get go was to transition to a different consensus mechanism called proof-of-stake. With PoS, there's not mining in the traditional sense; instead, owners of ether coins can "stake" them in order to participate in a sort of a lottery, in which winners "create" the next block. And this switch isn't just some future fable; it will happen in an upgrade called Casper that's actively being worked on and is slated to kick in sometime in 2019 (Casper, you guessed it, will be a much more significant upgrade than Constantinople).?

Switching from PoW to PoS isn't simple. This is partly due to the big mining ecosystem that has grown around popular cryptocurrencies such as Ethereum, and partly because all the kinks of how PoS should work haven't exactly been ironed yet.?

But there's an additional problem. Ethereum has something called "difficulty bomb" built into its ruleset. It's a timer that progressively makes miners' work harder. This reduces the influx of new ether, and also makes mining ETH less lucrative. It's a bit of a stick that chases away the "old" miners and ushers in the new mentality of staking coins to "mine" new blocks.?

This is where EIP 1234 comes into play. Since Casper isn't ready yet, this change will delay the difficulty bomb by approximately 12 months. But, since everyone knew about the difficulty bomb timer for a while, its effects have been calculated into miner profits. So EIP 1234 makes another change: It reduces the block mining rewards from 3 ETH per block to 2 ETH per block.?

So, after Jan 16, it will take roughly the same time for an Ethereum miner to mine a block, but their reward for doing so will be reduced from 3 ETH to 2 ETH. It's not very complicated, but it will have long-lasting consequences on Ethereum.?

What about the price?

Image: coinmarketcap.com

Again, EIP 1234 does not change much for most Ethereum users, but it is quite a big change for people who mine ether. Some may switch to mining other cryptocurrencies, but because of the way Ethereum was designed, mining will still stay profitable for most.?

Of course, one question that many ether owners will be asking themselves is: What happens to the price of ether after this change??

This is hard to answer. Ethereum has been extremely volatile in the past two years, with the price dropping from a high of nearly $1,400 in January 2018 to a low of $85 in December — and all that happened without a significant network upgrade. In other words, if price is jumping up and down like crazy (the price went down more than 20% in the last couple of days, for example) for little or no reason, trying to price in the effects of Constantinople is folly.?

Still, there are reasons for cautious optimism. Reducing the influx of ether should, theoretically, drive the prices up, though the effect will likely be mild. Furthermore, if the upgrade goes as planned, it reduces uncertainty, which is typically good for the price.?

Again, the TLDR on this one is simple: If you own ETH, there's no need to do anything ahead, during or after the Constantinople upgrade. Hopefully, the upgrade will go as planned and pave the way for Casper later this year.?

Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH.?