EIP 1559 Explained: Ethereum’s Fee Market Upgrade

EIP 1559 Explained: Ethereum’s Fee Market Upgrade

Introduction

The long-awaited Ethereum London upgrade is almost here with the mainnet activation scheduled to be on Aug 4.

EIP-1559 is one of Ethereum’s most highly anticipated updates. The dynamic proposal looks to alter Ethereum’s transaction fee calculator mechanism. The modification will split the transaction fees into base fees and tips.

What has everyone so excited is that the upgrade will introduce a burn of gas fees on every transaction, curbing ETH’s inflation and increasing its scarcity.

As Ethereum readies itself for one of the most awaited updates so far, let’s take a closer look at the proposal.

What is EIP-1559?

EIP-1559 is a proposal that attempts to make Ethereum transactions more efficient by using a hybrid system. The system introduces a split fees mechanism to incentivize the miners more evenly in periods of high and low congestion.

In the proposal, the fees will be broken down into base fees and tips.

The base fee is the algorithmically determined price users pay to execute a transaction on the Ethereum network. Whereas, tips are the optional fees that users may pay to speed up their transactions.

With the proposal, Ethereum developers aim to greatly reduce transaction costs and improve the overall user experience.

How is this different from the current fee mechanism?

EIP-1559 gets rid of the first-price action as the main gas fee calculator. In this mechanism, users bid a set amount of money for their transactions to be processed on the network, and the highest bidder wins.

With EIP-1559, a discrete base fee will be introduced for each transaction to be included in the next block. Users who want to ‘speed up’ or prioritize their transactions can add a ‘tip’, also known as a ‘priority fee’, that will be paid to the miner for faster inclusion on the block.

Currently, miners are paid transaction fees in addition to receiving block rewards of 2ETH per block plus uncle rewards.

With the introduction of the new fees mechanism, the miners will continue to receive the block rewards but the base fee will be burned. However, they can receive an additional ‘tip’ for a transaction if the user chooses to ‘tip’.

You can now watch ETH being burned in real-time on the Ropsten testnet using this tool: http://watchtheburn.com

How Does It Work?

The EIP-1559 upgrade promises to streamline the user experience by improving how transactions are processed.

In times of increased network congestion, there will be an increase in the base fee. Users who have paid tips will get their transactions processed first. Non-urgent transactions that did not include a tip will get processed once all the urgent transactions have been executed and the base fee has decreased.

With the implementation of EIP-1559, Ethereum developers believe that even in times of high congestion, most users will not have to wait long for their transactions to be executed. Ideally, the transactions will be processed with a few blocks which means users’ transactions will get confirmed in less than a minute.

Will There Be Any Reduction In Gas Fees?

High gas fees are a problem that everyone who has used the Ethereum network in the past 6 months has experienced.

This has gotten everyone asking if there will be any reduction in gas fees as the upgrade looks to alter the fees mechanism.

Unfortunately, the upgrade will not result in a massive reduction in gas fees.

This was also confirmed by Ethereum software solutions provider, ConsenSys, which stated: “This is not the intent of the EIP. As a side effect of a more predictable base fee, EIP-1559 may lead to some reduction in gas prices if we assume that fee predictability means users will overpay for gas less frequently.”

EIP-1559 Launch Details

Tim Beiko, a key coordinator for the project, proposed that the launch for mainnet activation take place on block 12965000 between 13:00 UTC and 17:00 UTC on August 4th.

EIP-1559 was initially expected to be launched around July 14th. However, the launch has been delayed and the upgrade is currently going through various testnets.

On June 24th, the first block of the upgrade was produced on the Ropsten testnet. The next phase was deployed on the Goerli testnet from late June to early July. Currently, the rollout is deployed on the Rinkeby testnet.

Wrapping Up

Despite the positive news around Ethereum with the approaching upgrade, ETH prices have continued their downtrend.

In times like these, we should zoom out and look at the long-term benefits of such an upgrade. With the introduction of the mechanism for burning fees, the upgrade can bring a deflationary change to Ethereum’s economics which will help push ETH’s price in the long run as the asset will become more scarce.

EIP-1559 has the potential to be one of the most significant upgrades to Ethereum in its history. The upgrade will replace some of the current network’s technical infrastructure with a more flexible automated system that will benefit every stakeholder.

The upgrade also highlights that Ethereum is a project that is still actively under development. This is a sign that in the future, we can expect similar upgrades that may even aim to improve the core aspects of the system.

What do you think about this upgrade? Will the reduction in fees motivate you to use the Ethereum network more often?

Let us know what you think!

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As always, please reach out to us with questions, comments, and suggestions! info@vegaxholdings.com

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