Ethereum with EIP-1559
In this article, I will explain to you about EIP-1559 and try to point major questions.
An issue in the current ETH system?
What is EIP-1559?
How EIP-1559 solved the current issue on ETH?
Let's start and point out the above question.
EIP-1559 is a big improvement on the ETH platform, EIP-1559 is essentially proposed to change the Ethereum fee structure.
An issue in the current ETH system?
Let's look at how Ethereum transaction currently operates. The current Ethereum transaction mechanism called the first-price auction.
There are three major problems with the status quo of transaction fee markets. Please go through the link for details.
- The mismatch between the volatility of transaction fee levels and the social cost of transactions.
- Inefficiencies of first-price auctions.
- Instability of blockchain with no block reward.
“first-price auction, where users submit their bids to include their transaction in the block. This competitive bidding causes congestion and increased gas prices across the Ethereum blockchain. Not to mention, some users often end up needlessly paying more than others who have transactions included in the same block. It’s far from fair or efficient.
What is EIP-1559?
EIP, or Ethereum Improvement Proposal, are changes to the platform-including core protocol specifications, client APIs, and contract standards-proposed by any community member and then discussed internally. The EIP was first proposed in April 2019 by Ethereum co-founder Vitalik Buterin himself.
How EIP-1559 solved the current issue on ETH?
- So, how will EIP-1559 fix these current issues? It won’t fix them all, but it will be a start. By deploying a Base Fee. It targets the market and adjusts the gas price through the block by block basis. In this scenario, users doest have to select the Slow, Average, or fast option.
- EIP 1559 helping users to send transactions higher than the base fee, the base fee can fluctuate and tip to the miners including them in the block.
- To counter this, users can specify a Fee Cap. This is the maximum they want to pay. After inclusion, they are refunded the difference between the final Base Fee and their Fee Cap, and don’t forget the tip!
- Wallets can set this value by default, so users won’t have to set it manually each time.
- EIP 1559 helps when Ethereum blocks get more than 50% full, the gas costs for inclusion will increase. When blocks get to less than 50% full, the gas costs decrease. This EIP aims to smooth out Ethereum gas fee volatility while helping users better estimate their transaction rates and times
- ETH’s supply effect while using EIP 1559. Using EIP 1559 helps to burn gas fees, gas fees paid by eth, so in this case, more eth burn more transaction will occur. This will help ETH .
- Update Formula: The formula proposed for updating the base fee, per block, is
- EIP-1559 reduces miner’s incentives to try to mine older blocks. It accomplishes this by burning the ETH rewards paid to miners, which reduces their incentives to focus on older blocks after new ones have already propagated.
Pros & Cons of EIP 1559
- Pros of EIP 1559
> Potentially lower fee. As each block can now fit more transactions, transaction prices may fall to a lower and more reasonable level.
> Avoid User overpays and adjusts the gas price by targeting the market.
> Base fee burning inflation.
> Reduced network congestion. Since block size can increase in response to demand (only up to a certain limit though).
- Cons of EIP 1559
> Miners incentive directly impact, because the base fee gets burned. ( note: miners still earn from tips & block_rewards )
> GAS fees did not optimize fully.
Conclusion
- First price prediction fixed.
- EIP provides a base fee mechanism.
- EIP 1559 provides to increase in user experience by fixing gas fee estimation and less variable gas price with the same security guaranty.
- ETH supply influence by using EIP 1559.
- Since over 40% of the miner’s revenue comes from transaction fees, EIP-1559 will likely decrease revenues.
References
https://uncommoncore.co/eip-1559/
https://medium.com/coinmonks/economic-analysis-of-eip-1559-a-summary-afac46533928
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