MAY 28, 2021
What is Ethereum’s EIP 1559?
The Ethereum Improvement Proposal (EIP) 1559 refers to a change reference in the GitHub community for ETH’s open-source developers. The so-called London network hard fork, coming in July, will codify a new fee structure which will set the ground-works for the eventual release of Ethereum 2.0.
The improvement proposal will solve four key issues with the current model:
- Making transaction fees more predictable.
- Reducing transaction confirmation times.
- Improving user experience through an automatic fee bid system
- Creating a positive feedback loop between network activity and the ETH supply.
The problem with Ethereum
Currently, the Ethereum gas model relies on a simple ‘first-price’ auction model. In this form, users can choose gas prices they’re willing to pay for, thus creating a competitive landscape for miner attention on the Ethereum blockchain. The system inevitably ends up favouring those who are willing to pay higher gas prices in order to get a transaction processed ahead of others in the queue, creating a feedback loop where network users lose out.
At the same time, miners monitor the bidding landscape and filter pending transactions, prioritising the highest gas bidder to maximise profits. Consequently, users must place higher and higher gas bids during times of network stress and congestion in order to be included into new miner blocks. Bidding too low potentially means a transaction might be filtered out and fail to go through completely.
This creates an inefficient system that is heavily skewed towards miner revenues. Since 20th December 2020, gas fees have been a particularly hard-hitting pain point due to rising demand to use the Ethereum blockchain.
The solution: EIP 1559
EIP 1559 was originally proposed by Vitalik Buterin in 2018. The idea is to rework Ether’s first-price auction model to one with a determined base fee. In doing so, much of the volatility and uncertainty associated with paying gas is essentially removed from the network.
It will also introduce a ‘fee burn’ system whereby a portion of fees will be removed from circulation, which will add a deflationary element to the ETH currency thereby increasing its appeal as a hard asset. This is not the main function though.
The ‘fee burn’ system is part of a core change which states that miners will only receive rewards in the form of inclusion fees (hence the burn). This reduces the risk of miners colluding in order to fix the base rate, but also helps to remedy Ethereum’s inflationary character – which is in part due to the rise of decentralised finance (DeFi) protocols and Non-fungible tokens (NFTs).
Specifically, the new model suggested by Buterin introduces a base fee that represents the minimum fee that will have to be paid in order for a transaction to be included in the next block. The fee changes on a block-by-block basis and varies depending on the network’s congestion. EIP 1559 also includes a mechanism to increase the network’s capacity based on congestion. Additionally, the block size will be increased from 12.5M to 25M.
The upgrade is intended to keep Ethereum close to a 50% usage rate. If the network usage surpasses 50% then the base fee automatically increases. Conversely, when the capacity is below the threshold, it will decrease. Since the maximum difference in base fees operates on a set constraint, the base fees become predictable as previously alluded to.
All in all, EIP 1559 is a turning point for the Ethereum ecosystem. It will significantly simplify user experience on Ethereum wallets such as MetaMask while also replacing a fee mechanism which is no longer suitable for the exponentially growing network.
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