June 03, 2021 |James Messi
Since its inception, ETH has been incredibly successful at spurring adoption relative to its predecessors. The Ethereum ecosystem is competitive, albeit with transaction fees that leave plenty to be desired. It would be beneficial to the average ETH holder if gas fees were reduced and transactions were completed faster.
The EIP-1559 is an upgrade in the Ethereum ecosystem that has a two-tiered fee structure and a highly elastic block size. These features might make one excited with the prospects that have been opened to them, and rightfully so, given that these improvements make it easier and more affordable to perform transactions with Ethereum.
Let’s take a closer look at the specifics of the EIP-1559 proposal so to assess how successful it can be.
The Proposal: A Boon for Ethereum Users?
- The “Single Fee” DissolvedEIP-1559 boasts two new types of fees. The Base Fee is the first and simpler between the two. This is subjected to the concept of “burning”. After EIP-1559 is implemented, inflation of new ETH tokens will decrease as all Base Fees will be permanently burned.The Inclusion Fee is the second type of fee. This is a reward for ETH validators that maintain the Ethereum protocol and secure it from attacks.
- The Elasticity of BlocksThis proposal renders the blocks in Ethereum greatly dynamic and grants the capability of increasing and decreasing that is reliant on the congestion within the network. Through this improvement, the maximum gas limit for each block will be pegged at 25 million. This is twice the present limit set for every block.And while the current target is retained, block elasticity will permit the usage of bigger blocks for that add efficiency to the processing of transactions.
What Drives the Proponents of the Proposal
What the developers of the EIP-1559 proposal had in mind in its creation is the apparent inefficiency that results from the simple auction function. This leads to a number of unfavorable conditions such as:
- Uneven levels of volatility of the fee structures and the social costs of each transaction – Unnecessary delays for Ethereum users
- the ineffectiveness of First Price Auction
- The instability of the Blockchain
- Absence of Block Rewards
The EIP-1559 starts with an upward and downward adjustment of the Base Fee performed by the protocol with consideration to the congestion level the network is subjected to at that time.
Issues on the Current Ecosystem
As an ETH miner may already know, he or she is rewarded with transaction fees. While this is normal, it is not necessarily desirable. Every transaction on the newtork costs a non-trivial amount of money. Miners are given incentives through the preference of transactions with fees that are marginally higher. This current structure provides miners with an exception return on investment.
Based on the current fee model, those who want faster transactions must pay a higher gas fee. This is referred to as the First Price Auction Model. What this means for users that offer higher bids, the chances of their transaction’s inclusion in the nearest block would be higher. What this tells the common miner is that the ecosystem does away with lower-value use cases. What users might find glaring here is that the First Price Auction function provides no method of calculation of the optimal fee for a transaction.
For instance, if you threw in a gas Fee of $15 with consideration of the higher transaction fee of say $10 while all participants are bidding at $8, it is advisable for you to place, say, $9, saving you $6 while giving you the same spot in line as if you had bid $15.
This is another benefit of the proposal. ETH users will have much more efficient expensidures when they can see the optimal bid value for fees at a given time.
One thing that can easily solve this is the introduction of the Uniform Price Auction. Here the succeeding bid is always higher than the one that came before. The loophole here however is that miners are given permission to place their own transactions in a block, effectively raising the potential of the gas fee (albeit artificial) that serves to maximize revenues.
The Solution: EIP-1559
The EIP-1559 provides a brand new transaction pricing method that serves to resolve the issues that are endemic to the widely-used First Auction Model.
The Base Fee is pegged for every block. This gas function is meant for both the parent block and its gas target.
If the blocks exceed the gas limit, there will be an increase in the Base Fee. Consequently, when the target goes below the limit, there will be a decrease in the Base Fee.
Another factor for the increase in Base Fees is the compounding of network congestion. When congestion is low, fees drop accordingly and transactions are processed in shorter timeframes.
As the Base Fee is effectively burned, Ethereum will receive deflationary pressure. This manifests through ETH’s issuance rate. Every year, the coin is pegged at 4.5%, but upon issuance rate estimation, after implementation of the improvements, it is estimated to drop to a level between 0.5 – 1%.
The Proposal: EIP-1559 Outlook
The primary issue stemming from the 1559 proposal is that miner revenue is expected to decrease substantially with the inclusion of the base fee. Once the upgrade has been completed and miners are only able to collect the arbitrary inclusion fee, their incentives to maintain and secure the network are significantly reduced. Only time will tell how this will playout amongst the users, developers, and validators in the Ethereum ecosystem.
Addressing this issue, 2 out of the 3 notable expansive mining pools for Ethereum have expressed their concern over EIP-1559, with Sparkpool, constituting over 50% of the participants in the ecosystem against it and F2Pool comprising 11% actually agreeing to its terms.
This coming July, the EIP-1559 will be implemented alongside the London Hard Fork, totally disregarding the apprehensions aired by the ETH mining community.
The Takeaway: What the Future Could Hold for Ethereum Validators
If there is anything that can easily be said about crypto miners, in general, it is that they are resilient and have great patience. Sure, this EIP-1559 proposal might appear like a runaway train that takes all the miners’ earnings. Stay tuned for more details and updates about Ethereum’s EIP-1559 proposal and the effects of its implementation.