Original title: "Understanding EIP-1559's Changes to Ethereum's Economic Model in Three Minutes" by The Defiant
The Defiant community of DeFi media platform The Defiant may be an unusual and opinionated bunch, but there is one thing we can all agree on — gas prices are a real drag on the Ethereum economy.
Just look at what’s happened in the last few months: Gas prices are skyrocketing, making it impossible for users to do all the cool stuff Ethereum was designed to support, like minting NFTs, sending money, or playing with DeFi apps and services. The volatility of Ethereum gas fees is also a boon for other blockchain projects like Solana and Cardano that are trying to compete with Ethereum.
Worst of all, the gas price — which is essentially the cost of processing transactions — is preventing Ethereum from truly being Ethereum. We may finally have a solution this week though: it’s called , and it’s a rollup of all the updates to the ethereum blockchain so far.
Goal Result: Ethereum users should be freed from the cost of using their favorite network.
This upgrade proposal was proposed at the Ethereum Developers Conference held in London, the capital of the United Kingdom in 2015, so it is called the "London" upgrade. It will be the most valuable cryptocurrency protocol hard fork after Bitcoin.
It aims to make gas prices more predictable and less susceptible to manipulation. What the London upgrade is looking to achieve: Ethereum users should be freed from the cost of using their favorite network.
To understand the significance of this change, you must understand how "gas" fees are currently calculated: for every transaction executed on Ethereum, you pay the miners "gas" or "transaction fees". Miners receive this fee as a block reward when validating blocks of transactions. When the accumulation of transactions increases, the network will be congested, and the Gas fee will also rise.
Gas prices are extremely volatile
Gas transaction fees have varied greatly over the past few years: the minimum fee was around 2 gwei (10^9 gwei = 1 ETH), but it was as high as 500 gwei at one point. This means transaction fees run into the hundreds of dollars.
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Gas fee changes in the past 6 months, source: Ycharts
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Image via Metamask.com
There are many inefficiencies in this auction mechanism. One of the problems is that there is no simple strategy for choosing the best bid. For example, if you're willing to bid $0.50 for a deal, but everyone else is bidding $0.05, it would make more sense for you to bid $0.08. In today's bidding system, this is not easy to do. If you want a more detailed look at this issue, check out this article by Vitalik which explains it in detail.
Miners may also artificially increase the gas price by including their own transactions in a block, which is also a real problem.
Ethereum can process 15 to 20 transactions per second, which sometimes creates transaction congestion and increases gas prices. In some cases, transaction fees for just transferring money on-chain have skyrocketed into the hundreds of dollars.
Problems caused by high and unpredictable gas prices
When gas prices are so high, it may force developers to switch to other blockchains such as Solana or Cardano. Users are also naturally negatively affected if they may have to pay up to $30-50 to swap tokens on Uniswap or Sushiswap.
The high gas price is not the only problem, another problem is that the cost is very unpredictable. Some times they are pretty low, other times they spike. As of our press time, the average fee per transaction was $7.982.
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Image source: Ycharts
The EIP-1559 proposal hopes to change this by removing Ethereum's gas fee auction system and replacing it with a basic fee mechanism. This means that instead of just paying the miner a fee, you now pay a base fee (which gets burned), which you can then tip the miner.
How will the gas fee level be determined after the EIP-1559 upgrade?
Abandoning the auction method, EIP-1559 will introduce a basic Gas fee, which will vary according to network transaction traffic. The base fee will be burned, meaning it will not go to miners.
There is also something called "priority fee", which can be compared with tipping. Therefore, if users want their transactions to be at the top of the queue, they can add a priority fee.
EIP-1559 also increases network capacity by changing the maximum gas limit per block from 12.5M to 25M. This means that when the network utilization is > 50%, the base fee is gradually pushed up. On the contrary, when the network utilizationWhen <50%, the base cost is reduced. Therefore, the Ethereum network will adjust the fee according to the traffic to achieve a balance of 50% capacity level.
There are also intense discussions about what will happen to miners' income after the EIP-1559 upgrade. Clearly, the trend is towards reducing their income; figures vary from 20% to 35%.
Still, with all the promise and promise of a new, more stable era to come, the upgrade shift to EIP-1559 raises a lot of questions.
First, will EIP-1559 lead to lower gas prices? It's a trending topic on Twitter, Ethereum forums, and Reddit. The answer is unknown.
It is also important to note that for gas prices to be fixed, the main goal of EIP-1559 is to make fees more predictable and less volatile, not cheaper.
Still, some transactions may have lower gas prices, while others may have higher gas prices.
Will EIP-1559 be the graveyard of the mining industry?
Many people in The Defiant community predict that the value of ETH will rise after the EIP-1559 upgrade, and the reason is: the destruction mechanism is a way to make ETH a deflationary asset. But again, many other factors affect the price of cryptocurrencies, so we cannot be sure until changes occur.
There are also intense discussions about what will happen to miners' income after the EIP-1559 upgrade. Clearly, the trend is towards a reduction in their income; figures for reductions in income are projected to vary from 20% to 35%.
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Source: Medium page of Spark Pool
But given the existence of the priority fee mechanism, miners still have a lot of money to make. Additionally, mining will be completely removed from the network when Eth 2.0 goes live, so it makes sense for miners to embrace EIP-1559 while mining mechanisms still exist.
A more imminent risk: Dissenting miners could launch the fabled 51% attack on ethereum, which could lead to another fork.
The Predictability of Ethereum’s Future
When quietly appreciating this historic moment, it is important to realize that the EIP-1559 upgrade was designed to improve the reliability of transaction fees and reduce transaction congestion. So it’s no surprise that both veterans and newbies of The Defiant community are excited about what’s to come.
If Ethereum wants to continue to be the power engine of DeFi and NFT, it needs to solve the Gas fee problem. Hopefully EIP-1559 is a step in the right direction.
