What is EIP-1559 and how this update will fix the high fees issue on the Ethereum network

In mid-April, Ethereum is waiting for an update called Berlin, which will optimize the use of gas on the network and prevent possible attacks on the blockchain. The next big update after it will be London, tentatively scheduled for July.

It includes the so-called EIP-1559, which is ready to seriously change the situation with network congestion and high commissions. And while it is beneficial for ETH users, miners have spoken out against the implementation of the improvement.

To begin with, let’s clarify that both mentioned updates relate to the current Ethereum network, which works due to the Proof-of-Work consensus mechanism – that is, miners with video cards.

Berlin and London are not part of the eth2 chain, which launched on December 1, 2020. And although the networks will eventually merge, now the current Ethereum 1 and the PoS network Beacon Chain are different things. And the further content of the article will refer specifically to the current Ethereum network with miners.

What is EIP-1559

EIP stands for Ethereum Improvement Proposal, which means “Ethereum Improvement Proposal”. In fact, these are targeted improvements to the cryptocurrency network that make up large updates. For example, Berlin in April will consist of four EIPs: 2565, 2929, 2718 and 2930. Each of them focuses on a specific area of ​​the network, although in the end they overlap with each other.

Specifically, EIP-2930 will “mitigate” the increase in gas consumption when using certain opcodes on the network, which will implement EIP-2929. We wrote more about this topic in a separate article.

EIP-1559 is part of the London update, which will be rolled out this July. In general, it changes the principle of forming commissions in the Ethereum network. As a result, it will improve the experience of interacting with the blockchain and save the costs of making transfers.

Now commissions in the ETH network are formed on the basis of an auction. Since miners add to the block and confirm first those transactions for which users paid a large commission, this forces the latter to spend more. And when the network gets busy, the fees can be absurd.

For example, on February 22, 2021, against the backdrop of a market collapse, the price of gas in Ethereum exceeded 1,000 gvei. This means that the cost of an ordinary translation was calculated in tens of dollars, including reaching 51 dollars.

gas ethereum

Gas cost in the Ethereum network on February 22, 2021

Swaps on the Uniswap decentralized exchange could cost the equivalent of $ 600. Naturally, at such prices, the platform became useless for most users who do not own tens or hundreds of thousands of dollars in crypto.

ethereum swap uniswap

The cost of swap on the Ethereum network on February 22, 2021

However, high commissions are a holiday for miners, whose earnings directly depend on network congestion. In this regard, the popularity of cryptocurrency mining has grown significantly this year.

For example, the number of miners on the 2Miners pool has exceeded 50 thousand people. 28 thousand of them are engaged in just Ethereum mining.

2miners pool miners

The number of miners on the 2Miners pool

That is, this year the ETH network essentially reached the peak of its congestion, which made it expensive to use it. This hinders the development of blockchain and makes it less popular. The developers want to fix the problem – and this is where EIP-1559 comes in handy.

What changes EIP-1559 in the Ethereum network

EIP-1559 completely redefines the principle of forming transaction fees. The old auction system will become irrelevant: instead, the concept of a base gas commission will be introduced, which will increase or decrease in each block as the network is congested. When forming the commission, the network will use a calculation formula that is guided by the volume of gas used in the previous block.

Previously, this indicator was called the gas limit, but now it has been renamed to “gas target” – “gas target”.

As a result, the base gas price will rise when the blocks exceed the gas target, and decrease when the indicator falls below a certain level. In this case, the base commission in the form of ETH will be burned, that is, the coins spent on transactions will be removed from circulation. In the long term, this will make Ethereum a deflationary asset – one that is decreasing in volume.

Miners’ fees remain: they are now referred to as “inclusion fees” in a block. Authors of transactions will indicate the maximum commission that will go to pay the base commission and remuneration to miners for including the transfer in the block.

Each transaction will pay the base gas commission, taking into account the block indicator it falls into, after which the rest of the funds will go towards the block inclusion fee intended for miners. This will happen in every case. An exception will be situations when the sum of two commissions will exceed the maximum commission specified by the user.

As noted by the authors of EIP-1559, it will solve many problems for users:

  • the discrepancy between the volatility of transaction fees and the social cost of transactions – when blocks are fully filled, the cost of an additional transaction increases significantly and disproportionately;
  • unnecessary delays for users – sometimes users need to wait many blocks, including hours and days, before receiving confirmation of transactions. This means that the network participants do not receive benefits due to the tight gas limit;
  • inefficiency of the auction model – a transaction of a user who paid a relatively small commission for making a transfer an hour ago will end up on the blockchain later than someone who paid more than one minute ago. And this can go on for a long time, which creates significant inconveniences for network participants;
  • instability of blockchains without a fixed block reward – in the future, cryptocurrencies like Bitcoin will get rid of the block reward due to the limited maximum amount of cryptocurrency. This means that miners will earn exclusively on transfer fees. Ethereum developers believe this will cause instability as BTC miners take an interest in mining so-called sister blocks to steal fees. EIP-1559 saves the ETH network from this threat, because the base fees will be burned.

However, for miners, this initiative will end with a drop in profitability. According to preliminary calculations, after the implementation of EIP-1559 in Ethereum, which is currently one of the most profitable cryptocurrencies for mining, it will begin to bring miners about 50 percent less funds.

How Ethereum Miners Reacted to EIP-1559

The prospect of losing half of the income of the Ethereum miners was not encouraging, so they decided to “show strength”. We are talking about the initiative of the miner under the pseudonym Red Panda: he offered to transfer his computing power to the Ethermine mining pool, which opposed the implementation of EIP-1559. He decided to do this on the first of April.

The miner clarified that he is not calling for an attack on the Ethereum network, but in this way he wants to emphasize the important role of miners in the blockchain and urge them to reckon with them. And although there was no talk of an attack, everything looked exactly like a threat in order to cancel the implementation of EIP-1559.

However, the initiative ended abruptly. Soon after the proposal was released to transfer computing power to a specific pool, the Ethereum community learned about the activity of Vitalik Buterin. He published a document titled “Forking Fast Merge Changes”.

We are talking about accelerating the transition of Ethereum to Proof-of-Stake, which was originally planned for the end of 2021. The peculiarity is that the so-called phase 1.5 involves the rejection of PoW mining.

Thus, Buterin made it clear that mining ETH on video cards could end much earlier than previously thought. As a result, analysts considered these actions as the developer’s response to the initiative of some miners, which was considered as a threat to the network.

The story did not end there. As a result, the miners proposed to implement the so-called EIP-3368, which would increase the reward for the Ethereum block from the current 2 to 3 ETH and further reduce it to 1 ETH within two years. The authors motivated the idea with a possible drop in the network hash rate after the implementation of EIP-1559, which would have provoked a decrease in the mining reward.

The Ethereum community was critical of the idea. Here is a quote from Hasu from Deribit Insights.

The proposal is completely stupid. Neither the author nor his supporters have provided compelling reasons why a 20-30 percent cut in miners’ rewards should create risks for the Ethereum network. Yet the Bitcoin block reward is halved every four years. Ethereum itself has previously reduced the block reward twice – by 60 and 33 percent, respectively.

As a result, the position boiled down to the fact that a decrease in the reward for mining in cryptocurrency would not force miners to leave the network en masse, thereby making it more vulnerable. This is especially true in the case of an increase in the rate of cryptocurrency.

Indeed, the decline in the Bitcoin block reward from 12.5 to 6.25 BTC took place in May 2020. Since then, the cryptocurrency rate has grown several times. The same applies to the network hash rate: and although it fell immediately after the halving, as a result, the indicator increased, and the BTC blockchain became more secure than ever.

bitcoin blockchain hashrate

Bitcoin network hashrate and cryptocurrency halving marked date

When EIP-1559 is activated

As a result, the implementation of EIP-1559 will take place approximately in July 2021. This will make the Ethereum network cheaper and easier to use as fees will be lower. In addition, a certain amount of cryptocurrency will be constantly burned, making ETH a deflationary asset.

And as Ryan Watkins, analyst at research firm Messari previously noted, turning Ethereum into a deflationary asset, along with the transition to Proof-of-Stake, will allow cryptocurrency to become the market leader, that is, bypass Bitcoin.

Representatives of Grayscale also give a positive forecast. According to them, the implementation of EIP-1559 will significantly affect the cost of Ethereum. And for the better.

We believe that improving the Ethereum network will really have a good impact on the future of cryptocurrency. The blockchain will better handle peak loads, and users won’t have to shell out huge sums for simple transfers. In addition, the supply of ETH itself will decline, which is a great property for a digital asset.

As a result, the implementation of EIP-1559 will be a preparatory stage for the network’s transition to a new version of the blockchain. Thanks to the upgrade and the transition to Proof-of-Stake, the network will increase its bandwidth thousands of times.

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