A Detailed Overview of EIP 1559: What to Expect

Ethereum’s London hard fork has activated at block 12,965,000 and EIP-1559 is now active. 

Introduction

EIP 1559 comes as a good news for those waiting to see a change in the Ethereum user experience and the ongoing gas fee system. The proposal has recently been accepted into London’s Ethereum network upgrade which is going to take effect on the mainnet by this summer. It has become a matter of intense debate, even though it has been over 2 years since it’s first proposal.

In simple words, EIP 1559, also called “ETH’s scarcity engine” or “ETH’s burn mechanism” is a proposal to change Ethereum’s fee structure. This is beneficial to the Ethereum community since burning ETH would increase scarcity. However, this is just one of the positives.

There has been a lot of talk around Ethereum going deflationary with the introduction of EIP 1559. Is that really the case? This article takes a closer look at the prospects of EIP 1559 proposal and how it intends to change the existing gas fee mechanism. Also, why some Ethereum miners are opposing it.

What is EIP 1559?

EIP stands for Ethereum Improvement Proposal. In this case, the improvement is the addition of a code. Anyone can add a code to an open-source software repository. However, to have the new code included requires a proper approval. In this case, the approval must come from the Ethereum core developers on Github.

Passing an EIP is a basic ‘Congress-like’ function. It isn’t a law till it gets debated, voted upon and approved. 

EIP 1559 in particular is a big deal as it brings a huge upgrade to the monetary policy of the second largest cryptocurrency. It actually flips a blockchain transaction on its head as it looks to address numerous issues with Ethereum’s user experience. Traditionally, a user would send a gas fee to a miner for a transaction to be included in a block. This fee will now be sent to the network as a “burn” (called a basefee) with only an optional tip paid to the Ethereum miners.

The proposal has thus garnered enormous support from Ethereum app developers and users, since they face difficulty selecting a current transaction fee. On the other hand, ETH miners have been gathering against the proposal as it progresses towards the mainnet.

Why EIP 1559?

Ethereum has been experiencing a lot of network and transactional issues – congestions and high gas costs, recently. The first price auction model was designed to serve the high-value cases and ensure that the blockchain isn’t filled with lower value cases. However, this leads to a problem. There is no way to determine the optimal price for a transaction.

Let’s say you include a transaction fee of $10 seeing the previous fees was $8. But, if everyone started bidding $5, you’d have been in a much better place if you included a fee of $6, saving you $4 instantly.

The current Ethereum wallet does not tell you how much fees you must be paying accurately, and users end up paying much higher than they should for a transaction to go through. Because of this, there are many new projects springing up capitalizing on Ethereum’s shortcomings.

To name a few there is Avalanche, Polkadot and Cardano. But the most significant is Binance Smart Chain and its players like PancakeSwap and Venus. Each of these projects is taking customers away from Ethereum with miniscule fees in comparison. Till there’s no sign of Ethereum 2.0 in the near future, the network needs an upgrade to divulge the pressure. Hence, EIP 1559.

EIP 1559 Features

EIP 1559 Burn Mechanism

A major impact of EIP 1559 is the change in ETH’s supply. What will happen is that the base fee will be burned. Since this fee is paid in ETH, more ETH will be burned as transactions occur. It is good news for ETH holders as this fee burn could lead to ETH inflation. But this doesn’t mean ETH will go deflationary. It is just a new theoretically deflationary mechanism, something Ethereum has lacked till date.

Also, Ethereum runs on a “Minimum Viable Issuance” policy. This means ETH issue amount is limited to ensure network security. This deflationary mesure moves Ethereum from Proof-of-Work to Proof-of-Stake. This is important as with POS, the cost attack becomes a function of how scarce the staking asset is. With this proposal, ETH would become more scarce and would help improve Ethereum’s security.

Layer 2 Solutions

The Ethereum we see today is not atall in its final form. Infact, it is far from it. Developers have been working hard on Ethereum 2.0. Yet it is far off from where we stand today. Meanwhile, there are other solutions to scale the platform.

Ethereum layer 1 is the main Ethereum chain layer. The upgrades coming with 2.0 pertain to layer 1. However, interim solutions that help scale applications are referred to as Layer 2. This is done by handling certain transactions off the main chain. Since, network congestion and slow transactions decrease the UX for dApps, these Layer 2 solutions add some relief for the users.

Typically, Layer 2 solutions revolve around a cluster of servers called nodes. Transactions can be moved off the congested main chain and submitted to Layer 2. Here, they are batched and sent back to Layer 1 to be secured.

Miner Extractable Value (MEV)

With MEV, Ethereum miners can set the order of transactions on the blockchain in ways to generate profit. This can be done by reordering and censoring transactions. ETH Miners can be incentivized not mine on the longest chain, because of arbitrage bots and bidding wars, ultimately destabilizing the blockchain. But with EIP 1559, there is less incentive to mine the older blocks. This is done by burning the ETH rewards paid to miners and disincentivizing focus on older blocks after new ones have already propagated.

Threat of 51% attack

Ethereum Mining pools are short of options to stop EIP 5199, and most of these are actively hostile against the network. The biggest danger is 51% attack against Ethereum, which would censor transactions using the EIPs framework. Although, it remains unlikely considering the various financial incentives provided to not to attack the network.

A successful 51% attack against Ethereum could decrease the value in the short tem (or not, as three 51% attacks on Ethereum Classic depict).

However, with MEV in place, ETH miners can take advantage of their place as arbiters in how blocks are packaged, helping them front-run profitable trades. MEV is popular among DeFi (decentralized finance) traders who bid up gas prices. Many Ethereum mining pools are now implementing MEV and utilizing an untapped source of revenue.

Roadmap

EIP 1559 – the so-called Ethereum free market overhaul, was originally proposed in 2019 by Vitalik Buterin and Eric Conner and has been in active development ever since. The Ethereum cat herders held a community call on 26th Feb 2021 on EIP 1559 featuring the major stakeholders concerned with the proposal. 

The next few months, however, will see the project take the next few steps on its development. However, at a recent All Core Developers Call on the 5th of March, it was decided that EIP-1559 will be packaged with the London hard fork of August 2021, thus the proposal has been green lit for the month of July. Ethereum’s London hard fork has activated at block 12,965,000 and EIP-1559 is now active. 

At the end, as every solution ties to ease Ethereum’s pains, EIP-1559 would increase the long-term sustainability.

Hope you found this EIP 1559 review useful. Head over to ItsBlockchain to discover more detailed guides and curated lists.