The Ethereum 1.0 fee model is a win to miners to the detriment of the users. However, EIP-1559, launched on 5th August 2021, is a core proposal to improve the efficiency of the Ethereum transactions, said to be investor-friendly. In the current Ethereum network, users sometimes overpay to be included in a block while miners profit. Not only that, users overpay, but there are also occasions where the network gets congested, resulting in confirmation delays. Besides that, the network is somewhat volatile and leads to losses and less predictable transactions. For example, fees can be as low as 2gwei. Other times it could be ranging from 20-50gwei, while there are occasions when it hits 200gwei, taken 10^9 =1ETH.
The above limitations of the Ethereum network often turn off users. Hence, they go for faster and cheaper transaction fee networks like Binance Smart Chain and others. To address the issues ahead of the Ethereum 2.0 launch in 2022, the Ethereum community is coming up with some proposals called Ethereum Improvement Proposals, EIP. One of such proposals is EIP-1559.
EIP-1559 is an Ethereum improvement proposal positioned to address confirmation delays and less predictable fees structure and introduce a burning mechanism to Ethereum's native token. This article is necessarily discussing in detail the EIP-1559, the benefits, and the implications to users, miners, and the network. Meanwhile, it is important to start with the current Ethereum fee model before the emergence of EIP-1559.
The current transaction fee mechanism of Ethereum 1.0 is the auction fee model. Better preferred is the first price auction fee model. The first price auction model is an unpredictable fee mechanism where users bid to make transactions on the Ethereum network. Sometimes, other users might have bid higher before transactions could be processed, making the user's transaction pending until the network stabilizes or drops to the bidding price.
For instance, user A bid to swap on Uniswap. On The other hand, a new token is launched, or other Ethereum network activity increases, making other users push for aggressive buying to make transactions. For those user's transactions to get processed, they need to bid higher and thus get their transactions confirmed faster. Notice that User A, who bid first but with a lower fee, kept waiting for confirmation while others with higher bids have been processed. To reduce the unpredictability of the auction fee model, wallets and exchanges are currently setting estimated fees that are often overpriced. A close look at the auction fee model shows that miners take up the transaction fees, including block rewards and uncle rewards, without feedback to the network.
However, EIP-1559 is promising to do things differently. Some will ask if other auction fee models aren't efficient enough. For instance, the second price auction, also called truthful or kth price auction, where everyone pays a gas price equal to the lowest gas price included in the block, although efficient in the traditional economic model, often results in collusion flaws in a blockchain or distributed network.
The EIP-1559 is designed to solve the following problems of the auction fee model:
To solve the problems above, the Ethereum community has agreed to deploy a complex economic model and real-time blockchain usage, which further provides more transparency to the fees and volatility of the network.
EIP-1559, unlike other EIPs, has been debated mainly since Buterin Vitalik announced it in 2019. It brought mixed reactions: miners are against it while users and investors are happy to welcome it. The question lies on why the debate and what is EIP-1559 offering to the Ethereum network?
The bone of contention here is that EIP-1559 changes the way network fee is made on the Ethereum Blockchain and increases the network capacity. Below are how EIP-1559 is changing the game of Ethereum transactions:
This is the algorithmically determined network fee proposed by the EIP-1559. It is also the minimum fee a user pays to include a transaction on the next block. Unlike the auction fee model, it is determined by the network and not the wallets and exchanges. That way, users know the price of the transaction beforehand. However, it does not necessarily make Ethereum network transactions cheaper as they can be adjusted up or down depending on network activities. But it makes the network more user-friendly and more predictable because users will know what they are paying beforehand.
The base fee is charged from users and further burnt, helping to prevent miners from colluding and inflating the network.
Traditionally, wallets have categories of fees they charge users. Some categorize their estimated network fees as regular, priority, and custom, while others categorize theirs as small, medium, and high. What that means is that users can pay more for faster transactions. The miner's tip, also known as priority tip, is paid to miners to confirm transactions faster. Ideally, miners verify and process transactions in the order of their profitability. This way, miners earn for securing, validating, and processing transactions on the network. However, the EIP-1559 includes a refund mechanism that refunds excesses once they exceed a particular block's maximum fee.
This is a custom kind of transaction fee that allows users to pay a certain amount of fee they want but is at the mercy of the network activity often. Let's say the network is high and requires over 50% of the gas limit. The transaction takes so long to confirm, waiting for the transaction fee to come close to the capped fee to be included in a block.
The EIP-1559 comes with a block size improvement. It expands the block size from 12.5M to 25M. With this, the base fee rises and falls depending on the utilization of the block space. The base fee rises when utilization is near 25M and reduces when it nears 12.5M gas demand. By implication, this helps wallets automatically adjust transaction fees, unlike the random estimates of the current network.
EIP-1559 comes with several benefits to the Ethereum network performance and transactions. It proffers both security, monetary policy and user experience benefits as explained below;
Through a tweet, Evan Van Ness, author of the week in Ethereum, explained that the EIP-1559 upgrade is an important, long-term step against denial of service (DOS) attacks, an attack that denies legitimate users access to services and computer networks.
According to him, "Want to spam the chain while shoplifting ETH in hopes of profiting? Well, with the EIP-1559, that's exponentially more expensive."
As the block space increases to almost 200%, the base fee keeps rising, making it costlier for attackers to afford sufficient block space to launch an attack.
Also, as the block space increases, the base fee rises and is burnt. For that reason, miners, who don't share in the base fee, have weaker incentives to perform near-head reorgs. Find more details about near-reorg and transaction fees effects here.
EIP-1559 makes fee estimation more predictable, hence, proffers a better user experience for users, unlike struggling to predict possible fees for transactions, say on Uniswap. The EIP allows users to consider three fee categories -base fee, fee cap, and priority tip to predict the possible transaction fee, unlike the legacy method where users bid and the highest is chosen. With EIP, a maximum fee is set for priority tips, and a base fee is set. The user sets a Fee cap which is compared with the base fee. When the Cap is in excess, the difference is returned to the user.
Unlike the current fee model, the EIP fee model helps a better estimation and user experience since the above-stated fees are known beforehand. For a better understanding of what EIP-1559 affects user experience in these fee models, refer here.
A term called “preventing economic abstraction of ETH” explains that users should pay with ETH and how healthy it is for the network. Unlike the current fee method, all fees, base, tip, and fee cap, are required to pay using ETH, the native token of the Ethereum network, instead of other assets. Doing that will help to increase the utility of ETH.
Under EIP-1559, all base fees are burnt and thus help reduce Ether's supply, which directly increases the valuation of the token. Hence, people suggest that it will make Ether deflationary.
As stated above that Base fees are burnt for every transaction. It also rises as the block space increases. The increase is thus burnt also, creating deflationary pressure on the supply of ETH. Better explained, more network activity (block space) is equal to more ETH burn equal less ETH supply, invariably more valuation of the native token. By implication, higher block space from 12.5m to 25m creates deflationary pressure.
The current EIP-1559 code specifications return a user’s maximum FEE CAP value as the gas price before the transaction is mined into a block. After the block has been mined, the gas price field changes to be the base fee. These changes on time and the state of blockchain possess a new challenge for decentralized app developers. Usually, a developer trying to debug their code runs into issues if the behaviour of the blockchain changes. To that effect, the changes associated with EIP-1559 code specifications comes a new debugging challenge.
According to Micah Zoltu, an independent developer, during an All Core Developers meeting said;
“Any time you’re debugging an issue and the behavior changes based on when you look at it, that becomes a very, very hard bug to debug. I suspect that most users and Dapp developers and library authors and whatnot probably are not watching closely on these things and they will not realize that there’s a change in behavior and the gas price field,”
The base fees are burnt while the miner's tips are sent to miners to include transactions in a block. Miners can sometimes monopolize pricing. This is a case where they set a minimum tip to receive. They can agree to refuse, including transactions with a certain tip on the block. Meanwhile, a good percentage of miners may not be interested in such a strategy.
The EIP-1559 has some effects on miners. Before explaining further, let's understand that, unlike the current Ethereum network where miners receive block rewards and gas fees for every block mined, the EIP-1559 only rewards miners for particular tips. That means that with the current block capacity of 12.5M, the miners will be losing more. Still, when the block space increases to complete 200% and the base fee rises and is burnt, thereby reducing the supply and increasing the value of ETH, the miner's tip will compensate for other losses.
One of the prevailing myths about EIP-1559 is that it will reduce transaction fees. The fact is that it may or may not. Still, the primary aim of EIP-1559 is to deploy a complex economic model to solve the unpredictability of the current transaction model. Besides that, it aims to provide a better monetary policy for users and the network. This way, it reduces the supply of ETH, the native token of the protocol, such that it becomes more attractive to investors.
Since the network's capacity is increased from 12.5M to 25M, the network has more block space. The more utilized the block space is, the higher the base fee to be burnt. This goes a long way to help improve monetary policy.
Simply put, EIP-1559 helps make a more predictable transaction fee possible, unlike the current transaction model where users bid. It ensures a refund if the Fee Cap is more than the Maximum fee and gives feedback to the network when the base fee is burnt.
EIP-1559 is a widely debated Ethereum improvement proposal. It comes with so many advancements and improvements to the Ethereum protocol. They include deploying a more complex economic model and real-time blockchain usage to allow DApps and wallets algorithmically determine fees using the base fee, Fee cap, and priority tip benchmarks. It also increases the network capacity and monetary policy because it makes ETH more attractive to investors and positions it for better market competition in the long run.
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