Ethereum’s EIP-1559 upgrade will transform how Ethereum collects fees and where they go. We will address the most common concerns that Ethereum users, dapp users, and developers have regarding EIP-1559, which will be included in the July London Hard Fork.
What is EIP-1559?
Ethereum Improvement Proposal (EIP) is a method of proposing improvements to the Ethereum Network that was inspired by Bitcoin Improvement Proposals (BIPs). An EIP is a design document that includes the proposed change’s technical details as well as the reasoning for the change.
The bulk of EIPs are focused on enhancing Ethereum’s technical features, and they are seldom addressed outside of the Ethereum development community.
The proposal EIP 1559, known as the “burning fees” proposal, reverses the sequence of a typical blockchain transaction in order to address a number of problems with Ethereum’s user experience. A user traditionally pays a miner a gas charge for a transaction to be included in a block.
The gas charge will now be transmitted to the network as a kind of “burn” called basefee, with miners receiving an optional tip. The burning charge is also determined by an algorithm, purportedly to make it simpler for users to pay a reasonable price.
How Will EIP-1559 Affect Transaction Fees?
The EIP’s aim is to make transaction costs more predictable, not reduce them. EIP-1559 may result in a decrease in gas costs as a side effect of a more predictable base charge, assuming that fee predictability implies consumers would overpay for gas less often.
After blocks are more than 50% filled, the basic cost will rise and drop by 12.5 percent with EIP-1559. For example, if a block is 100% filled, the basic cost will rise by 12.5%; if it is 50% full, the base price will remain the same; and if it is 0% full, the base fee will drop by 12.5%.
The continuing migration of apps to rollups and Layer 2s will be the primary factor in lowering costs. Because the protocol manages the basic fee, wallets like MetaMask will be able to make better predictions and will not have to depend as much on external oracles.
Predefined parameters will be provided by wallets depending on how urgent the transaction is for the user. Users will still be able to adjust the priority of their transaction in MetaMask to “low,” “medium,” or “high,” depending on the anticipated use of the preceding block and the kind of transaction.
When EIP 1559 is adopted, network costs may be smoothed out. Another way to think about this approach is to consider that it essentially trades high fee volatility for block size volatility.
The change in the base charge from block to block can be readily computed since the increments and decrements are limited.
This enables wallets to adjust the basic fee automatically depending on the information from previous blocks.
To prevent miners from collaborating and intentionally inflating the base cost for their own gain, the whole base charge is burned. Because the basic fee is always completely burned, the miner receives the “miner tip”.
How Will EIP-1559 Affect the ETH Network?
Mining will be less profitable. In the present fee structure, miners get the block subsidy as well as the full gas charge. Miners were able to collect more money from the fees than the actual block rewards due to the current high gas costs generated by DeFi, despite the fact that block rewards have always been considerably larger than the additional fees received from transactions.
Miners would only get the block reward + the miner tip once the modifications in EIP 1559 are implemented. This is also why most miners are hesitant to adopt the suggestion, which suggests accelerating the transition to ETH 2.0.
Instead of rewarding miners, burning the base fee compensates users of the network by making their ETH more scarce.
The fee-burning mechanism has also prompted speculation that ETH may become deflationary. This is conceivable if the block reward is less than the burned base fee. That was the case, for instance, during the DeFi gas fee frenzy, when the network was continuously overburdened.
Opposition to EIP-1559
Given the present difficulties of choosing the right transaction cost, the idea has received some of the most widespread support to date from Ethereum application developers and consumers. On the other side, as the idea moved closer to mainnet, miners and mining pools have started rallying against it.
Flexpool, a small mining pool, has started a marketing campaign against the EIP. Minority pools Ethermine and SparkPool were the first to join, followed by majority pools Ethermine and SparkPool.
Over 60% of the hash power on the Ethereum network is now opposed to the plan. With 10% hash power, F2Pool is the biggest pool in support of the EIP.
Ethereum developers chose to combine EIP 1559 with a difficulty bomb delay during the call. The bomb, also known as the “Ice Age,” gradually raises the difficulty of mining on the Ethereum network. Péter Szilágyi, the Geth team’s head, stated that combining EIP 1559 with the delay ensured that no one could split Ethereum at that moment without facing some technical difficulties.
Now that EIP 1559 has been added, mining pools only have a few ways to block it, and the most of them would be deemed actively unfriendly to the network.
A 51% attack on Ethereum would filter transactions using the EIPs architecture, posing the greatest threat. However, given numerous financial incentives not to attack the network, it remains improbable.
For example, if a 51 percent assault were effective against Ethereum, the value of ether would undoubtedly drop in the near term.
When Will EIP-1559 Happen?
Ethereum Improvement Plan (EIP) 1559 will be bundled with the London hard fork in July, despite the mining industry’s dissatisfaction with the proposal. EIP 1559 is expected to be joined in London by at least five additional EIPs.