Ethereum Improvement Proposals:
5 Insights for Institutional Investors

Understanding the fundamentals of Ethereum and how the network has evolved—and will constantly continue to—can be an important step in making well-informed portfolio planning decisions. This article aims to provide a high-level overview of Ethereum’s unique upgrade mechanism, highlighting how Ethereum Improvement Proposals (EIPs) are selected and implemented.

Why Does Ethereum Receive Updates?

The founding principle of Ethereum is an essential consideration when discussing EIPs. The network first launched in July 2015 with the explicit goal of expanding the capabilities of blockchain technology beyond “just” supporting digital currencies. Comparatively, its predecessor Bitcoin was created to provide a secure and independent means to hold value and transact.

At launch, Ethereum supported:

• Ether (ETH): Ether is the network’s native token and is used as both a digital asset and as a means to pay for transaction fees and computational services within the network. 
• Smart contracts: The Ethereum Virtual Machine (EVM) is a decentralized computation engine that executes smart contracts on the network. These digital agreements execute automatically based on predefined conditions, helping to streamline processes and reduce operational costs. 
• Decentralized (dApps): Ethereum provides a robust environment for creating and running dApps. These applications can span various sectors, including finance (DeFi), supply chain management, and more, presenting diverse investment opportunities. 

Although both Ethereum and Bitcoin prioritize stability, Ethereum’s protocol was inherently designed to be more flexible to support the creation and ongoing development of smart contracts and dApps. Bitcoin’s upgrade process is more conservative due to its primary focus on security and decentralization as a digital currency.

To achieve flexibility, Ethereum’s code allows for continuous improvements to be made in the form of EIPs. Continuous improvement is central to Ethereum’s original mission. Regular, community-driven upgrades help the network to adapt to evolving technological advancements and user demands, helping Ethereum to constantly extend its functionality outside of serving as a digital currency. 

Overall, EIPs are an important consideration for investors as they can impact the network’s performance—potentially influencing the value of ether.

How Are EIPs Selected?

There is no single individual who decides which EIPs are implemented. Each is selected through a collaborative process involving the wider Ethereum community and its core developers. 

First, a stakeholder in the Ethereum community will draft an EIP detailing the proposed changes, including their rationale and its potential impact. This draft is then submitted to the Ethereum GitHub repository and undergoes rounds of review. Consensus is gradually built through forum conversations, developer calls, and community meetings to gauge support and address potential issues. 

If an EIP gains sufficient support, it will undergo private and secure testing before being included in a scheduled network upgrade—also known as a hard fork. It is important to note that EIPs can fail to be approved at any point in this process.

By taking these steps, the Ethereum community can ensure EIPs are thoroughly planned and technically sound, contributing to the network’s long-term success. It is helpful for investors to actively monitor upcoming EIPs to anticipate changes to Ethereum, evaluate their potential impact, and make informed portfolio decisions.

How Often Are EIPs Implemented?

Historically, developers were open to multiple upgrades within a year to build out the network more quickly. Now, with Ethereum’s maturation, its community prefers grouping many EIPs into a single, annual upgrade.

An upgrade will typically include multiple EIPs bundled together, allowing developers to implement numerous improvements all at once rather than making frequent, smaller changes. This approach minimizes potential network disruptions, ensures compatibility, and enhances security. 

It is also important to note the exact frequency of upgrades depends on the network’s needs but has decreased over time. The once-a-year cadence is the general expectation set by developers going forward but may change based on the network’s evolving needs.

What Are the Most Notable EIPs?

EIPs are introduced as a direct response to the Ethereum community’s needs and top priorities—it is estimated that hundreds have been published and implemented since the network’s launch. Although these updates are all notable for distinct reasons, there are several investors should be familiar with:

EIP-20: ERC-20 Token Standard

This proposal was first introduced in 2017 and established a standard for creating tokens on the Ethereum blockchain, leading to the growth of DeFi offerings and DAO governance. After being officially implemented in 2017, ERC-20 has become the foundation for many popular fungible tokens.

EIP-1559: Fee Market Change

The 2021 London Upgrade introduced EIP-1559, bringing significant benefits to Ethereum users and ether investors. This proposal revamped the transaction fee system, making fees more predictable and transactions more reliable. It also split transaction fees into two parts: the base fee, which is burned upon execution, and the priority tip, which went to miners and now validators.

EIP-3675: Upgrade Consensus to Proof-of Stake

In September 2022, Ethereum underwent The Merge upgrade which transitioned the network from proof-of-work to proof-of-stake. The Merge was Ethereum's biggest upgrade at the time, reducing the energy consumption required to secure Ethereum by 99.95% and creating a more secure network for a smaller carbon cost.¹ Additionally, The Merge reduced the amount of new ether entering circulation each day, drastically lessening the inflation rate of ether supply.

EIP-4844 : Shard Blob Transactions

After successfully laying the groundwork for dApps, Ethereum hit a roadblock in the form of scalability. The Deneb-Cancun upgrade was introduced in March 2024 in response to this need. The most notable change of this upgrade was EIP-4844, which enhanced the network’s data capacity and reduced transaction costs for Layer 2 platforms.

It is important to note that the four EIPs discussed above are only a small representation of the most notable upgrades Ethereum has experienced. A more comprehensive list of all forks can be found on the official Ethereum website.²

How to Stay Ahead of Future Upgrades?

Upgrades are always announced in advance and across several channels to help community members and investors stay up to date. Within the Ethereum ecosystem, these announcements are shared on GitHub and the Ethereum Foundation blog in addition to external news outlets and social media.

For additional updates on future upgrades and notable EIPs, follow the Fidelity Digital Assets team on YouTube for timely coverage on these upgrades and their potential market impact.