Over the last few years, Ethereum has been at the forefront of the blockchain ecosystem. Vitalik Buterin proposed an open-source public service that uses blockchain technology in 2013. This technology facilitates secure smart contracts and cryptocurrency trading without the need for a middle man. Launched in 2015, Ethereum has gradually been developing with a series of upgrades over the years.
Recently, one major issue Ethereum users have faced is the high transaction fee and transfer confirmation delays. To solve these issues, the Ethereum Improvement Proposal (EIP)-1559 proposes to change Ethereum’s transaction fee structure. The protocol is also known as “ETH’s burn mechanism”.
How will the EIP-1559 affect the Ethereum blockchain? This article will look into what EIP-1559 is, why it is important to the Ethereum blockchain, how it affects Ethereum’s gas fee, and how it affects users, developers, and miners alike.
I know these terms can sound strange to new crypto users and enthusiasts. Believe me when I say I had slight headaches understanding some terms when I made my research. I’ll break down so many terms into relatable phrases so you can understand them perfectly.
The EIP-1559 is a proposal that was created by Vitalik Buterin to reduce the fee for each transaction. The EIP-1559 protocol reduces the circulating supply of Ether. How does it do that? Through the process of burning every time it is used to complete a transaction on the Ethereum blockchain. The Ethereum blockchain is congested because of the number of decentralized applications built on the network. This has led to issues with user experience and instability of the network.
The EIP-1559 protocol solves the inaccuracy of gas fee estimates. With the EIP-1559 update, Ethereum users can have a better estimate of average gas prices based on Ethereum’s internal averages.
Currently, the Ethereum network is experiencing a lot of network issues such as congestion and high transaction fees. This has made a lot of developers and users migrate to protocols that provide solutions to these issues. Over the years, protocols such as EOS, Solana, Polkadot, Binance Smart Chain, and many others provide scalability to their users. The need for low transaction fees has seen Ethereum users migrate to using platforms such as PancakeSwap.
The Ethereum network uses a mechanism called “the first-price auction“. What this means is that users submit their bids to include their transactions in the block. This form of bidding causes congestion in the network and leads to increased gas prices. Now, this won’t be an issue for crypto whales. But for everyone else like you and me, this is an issue. No one wants to pay a $20 transaction fee just to send $15 worth of Ether to another wallet. Imagine thinking you could purchase a service or an item with the Ether in your wallet only to see that the transaction fee is worth more than all the ETH in your wallet. That’s a mood killer.
How Does EIP-1559 Solve this Issue?
How does EIP-1559 become our savior? Well, don’t expect a Superman vs Lex Luthor fight. This won’t be an absolute solution. Expect a Superman vs Darkseid battle. It might do the job but it won’t be absolute. It’s sure going to be messy.
By deploying a Base fee, the protocol will target the market rate and adjust it on a block-by-block basis. Users can now make transactions and send a fee higher than the Base Fee along with a tip for the miner. The tip does not affect the transaction fee. However, it is more of an incentive for miners to include your transaction in the block quicker.
If the blocks involved are more than the gas target limit, the base fee goes up. If they are below the gas target limit, the base fee reduces. Also, if there is network congestion, the base fee goes up. If the network is not congested, then the base fee goes down.
The Base Fee can change between the time you initiate a transaction and the time the miner includes it in a block. To tackle this, you can specify a Fee Cap. This is the maximum fee you want to pay. Once it’s included, the difference between the Final Base Fee and the Fee Cap is refunded to you after the transaction is done.
How EIP-1559 Affects Ethereum Protocol, Miners, and Users
Like I said earlier, the EIP-1559 is more of a Superman vs Darkseid battle. You shouldn’t expect a big win with this update. The EIP-1559 upgrade will make transactions more efficient. However, this will not fix the scalability issues the Ethereum network currently has. What the EIP-1559 upgrade does is make gas fee reduction easier. It also helps you perform transactions on the Ethereum blockchain without wasting too much time. The EIP-1559 upgrade will make transactions smooth and also prevent users from migrating to other platforms.
Ethereum users get to enjoy the EIP-1559 update in two folds. The first part is that transactions on the Ethereum blockchain become less expensive and clogged than before. Ethereum users can now conduct transactions faster without the need to pay $200 as a transaction fee. Seriously, this is scary.
Now to the second good news. With the EIP-1559 update, what happens is that the Base Fee is burned. Since ETH is the currency used for gas fees, more ETH gets burned as more transactions occur. Moreover, Ethereum features a “Minimum Viable Issuance” monetary policy. This means that the network only issues ETH to guarantee the security of the Ethereum protocol. As more ETH is burned from transactions, the supply of ETH will reduce. And from our basic economics;
High Supply and Low Demand = Low Price
High Demand and Less Supply = High Price
With ETH becoming scarce, the price of Ethereum will rise. This is good news for ETH hodlers. ETH to the moon ? ??
One group that is not happy about the EIP-1559 update is miners. According to an article from Coindesk, Ethereum miners bagged a whopping $830m in January. Most of these come from transaction fees. If you are an Ethereum miner and you now see the EIP-1559 coming in to take away your major source of income, will you be thrilled? Of course, you won’t be happy about that.
Alongside the base fee, there is an inclusion fee that goes to the miners but that is not mandatory. Users can choose to add the inclusion fee or not.
Two of the three largest Ethereum mining pools have given their opinion on the matter. Although F2Pool is supporting the EIP-1559 update, Sparkpool is opposing the proposal.
The EIP-1559 update is a welcome development for the Ethereum blockchain. With the update, users can look forward to completing transactions without the need to pay excessive transaction fees. The EIP-1559 update also gives miners more control over the block size as their revenue becomes more predictable. The Burn Effect gives ETH hodlers joy as they can gain control over the price of Ethereum as supply lowers and the second-largest cryptocurrency in the world becomes scarce.
The EIP-1559 will be packaged in the London hard fork in July this year. All we have to do now is wait and see what the Ethereum blockchain will become in the last quarter of the year. Will there be improvements or will users still need to migrate to more scalable protocols like EOS or Solana? Only time will tell.