In today’s article, I am going to explore the upcoming change to the Ethereum (ETH) network that will bring a number of changes to the way transaction fees work. It is a pretty big change, and has a number of moving parts to it, beyond just the adding of a burn.
For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advise.
What Is EIP-1559
The Ethereum Improvement Proposal 1559 (EIP-1559), is a proposal that is currently implemented on the Ethereum (ETH) testnet, and will be coming to the mainnet in the not too distant future. There are a number of changes that are wrapped up together in this EIP which aim to overhaul the way the fee system works on the Ethereum (ETH) network.
In my previous article about gas prices and how they work, I mentioned how that current model works around essentially an auction system, where the people who are willing to pay higher gas prices get higher priority to be added to upcoming blocks by the miners.
One of the first changes the EIP will bring about is the concept of the base fee. No longer will the gas price just be an arbitrary number that can be entered in when the transaction is created, it will be a set amount that adjust automatically based on the network traffic.
The next big change is that the maximum gas per block is effectively doubling from 12.5 to 25 million gas per block. This will give a lot more space for transactions, and give the network a lot more capacity.
There will now be a miner tip that can be added to the transaction, to incentivize them to put your transaction into the next block. This replaces the old bidding system with a far more streamlined one. as only transactions that require a very fast turnaround, such as an arbitrage trade, need to make a high bid to ensure fast confirmations.
The entire base fee that is collected per block, is burned. This is to prevent miners anyone from being able to benefit from any market manipulations that may occur with the base transaction fee. The miners will only get the block reward, plus any miner tips that were offered in the transactions. The entire base fee is burned.
New Fee Model
With the changes to the maximum gas per block, and the creation of the base fee, the system is now able to automatically manage it’s own gas prices. Whenever the network capacity is over 50%, the base fee will increase in the next block. Conversely, whenever the network is under 50% used, the base price will decrease in the next block.
This will have the effect of making the gas prices predictable, as well as let the network utilization directly drive the gas price for transactions. It will also smooth out how the gas price increases/decreases, as the most the price can change per block is 12.5%.
Benefits From EIP-1559
There are a a number of benefits that will come from these changes to the Ethereum (ETH) network. Since the gas prices will now be predictable, the user experience of submitting transactions will be much more intuitive and easy, especially for newer users.
People will not overpay for their transactions as often, and it will avoid the issue of a gas price spike happening and causing people that submitted transactions with too low of gas prices to have to wait a lot longer for their transactions to process.
This will also make the UI of wallet applications much more simple, as they will no longer need to offer ways to set the gas price, as it will be easily determined by looking directly at the previous block and working out what the next price will be.
Inflation / Deflation
As the EIP brings about the fee burn, this could have the side effect of causing Ethereum (ETH) to actually experience times where it is deflationary instead of inflationary. As there is new Ethereum (ETH) mined every block as a reward, generally this would make it an inflationary asset.
If you look at recent gas prices, there has been plenty of times where the fee paid within a block has far exceeded the actual block reward itself, which is why a lot of miners have pushed back on this EIP. During these periods. if more Ethereum (ETH) is being burned during the block that is being created by mining, that would cause it to be temporarily deflationary.
This creates a feedback loop between the network activity, and the supply of Ethereum (ETH). During times of high usage, Ethereum (ETH) will be burned off, making there be less supply of it, almost like a reward to users of the network by making their Ethereum (ETH) very slightly more valuable, but making there be slightly less of it.
Other Considerations
One problem that this EIP puts into the system is less incentive for the miners. They will no longer get to slurp up the gas that is getting used in every block, and will only be getting the block rewards and miner tips. There was a lot of pushback on this, saying it should wait for the Ethereum 2.0 launch, which brings Proof of Stake (PoS) consensus, but it doesn’t appear that it’s going to be delayed until then.
Conclusions
EIP-1559 is an exciting new change to come to the Ethereum (ETH) network, but it is sadly not going to be the big change that is going to drop gas prices down to what would be reasonable for the small time investors like myself to play around in. For that, we will need to wait for Ethereum 2.0 and all of the other changes it brings with it.
What this will do, is make the fees much more stable and will be a vital component in the new ecosystem of Ethereum 2.0 in helping bring the prices down and make the network more usable for everyone.
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The Lightning Network
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Impermanent Loss
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Originally Posted On My Website: https://ninjawingnut.xyz/2021/07/05/eip-1559/