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What is EIP-1559? How is it impacting Ethereum?

What is EIP-1559

Key Takeaways

  • The Ethereum Improvement Proposal is a proposal aimed at improving and increasing the transaction speed by using hybrid systems.
  • The need for EIP-1559 arose after the Ethereum team reduced the reward of miners.
  • EIP-1559, a part of the broad update known as the London Hard Fork, is aimed at overhauling Ethereum’s dated transaction fee setup.

Ethereum Improvement Proposal (EIP-1559) is a proposal aimed at increasing the transaction speed of Ethereum mining by using hybrid systems. It is a part of the broad update known as the London Hard Fork, intended to make the transaction fee mechanism of the Ethereum market more predictable to users. The idea behind it was to improve the network security architecture.

The need for EIP-1559 arose after the Ethereum team reduced the reward of miners from 5 ETH to 2 ETH. Before the reduction, miners could earn both the transaction fee and the reward. So, the reduction resulted in miners focusing on the transaction with the highest gas fees to increase their reward, which led to network congestion. On the other hand, transactions with low gas fees or low bids took much longer to validate. Users had to bid a bit higher for a transaction to be approved. With the EIP-1559 proposal, miners were awarded only block rewards after mining each block and for validating each transaction. Let us understand the main features of the EIP-1559 proposal.

  • Base fee: This is the minimum gas price that any transaction must aim at for it to be involved in a blockchain. The base fee is the transaction fee filled by the transactor before any transaction can occur. The base fee sends information directly to the miners in the legacy transaction. Here, the users who tip the miners will likely get a quick validation compared to those who did not. Additionally, with EIP-1559, the base fee is not sent to the miners because it reduces the circulating supply and increases the value of Ethereum. The Ethereum blockchain system determines the base fee.
  • Tip fee: The tip fee is the amount transferred to miners by the user as compensation for any possible risks, slowing down the transaction process.
  • Fee cap:  This is the maximum fee the user is willing to pay. Once a transaction is validated, an amount is transferred back to the user as a refund. The user determines the fee cap and tip fee. It is important to note that the fee cap is only allowed when EIP-1559 is applied. But, if the fee cap is greater than the base fee and the tip fee combined, then any unused fee is refunded to the user.

Why was London Hard Fork introduced?

The London Hard Fork refers to certain Ethereum improvement proposals. They are intended to change the speed and improve the incentivization of Ethereum mining. It consists of five main elements, one of which is called EIP-1559. These elements enable the network to handle many transactions per second. Also, the update covers the high gas fee as it will cut transaction fees that users pay, which miners get as a reward.

The update was also to ensure that network congestion does not lead to an increase in gas fees. Hence, the London Hard Fork proposal changes the commission payment mechanism in the network, consisting of a basic commission and a tip for miners. In short, London Hard Fork’s major goal was to improve the quality of Ethereum users. In simple terms, its aim was to regulate the Ethereum fee market.

What are the benefits of EIP-1559?

Although EIP-1559 is a bit complex, it comes with many benefits. Let us understand what they are, practically speaking.

  • Network decongestion/transparency: This one eliminates the miners’ incentives. For this reason, miners have to validate transactions as they appeared on the queue. Earlier, validation relied on the price or the highest bid.
  • Reduced transaction cost: Here, the users do not need to bid high for their transactions to be validated. In this way, it helps to cut the unnecessary amount charged to users.
  • User-friendly: The users know how long their transaction will be in the queue or before validation. At this point, the transaction base fee is determined algorithmically by the system.
  • Increased security of Ethereum: EIP-1559 proposal makes the network more secure from scammers. Specifically, EIP-1559 offers protection against the Denial of Service (DoS) attack. A Denial of Service attack is a malware attack where a network or computer system is inaccessible to a legitimate user.
  • Improved stability: EIP-1559 makes Ethereum more predictable and less unstable.
  • A decrease in miners’ revenue: This is caused by eliminating transaction fees payable to miners before EIP-1559. EIP removes the fee manipulation vector; in case malicious miners try to manipulate the market prices, the application automatically burns the base fee, cutting the supply to a large extent.

Disadvantages of EIP-1559

  • Unexpected user errors may occur from time to time: It can create uncertainties for customers and app developers alike.
  • Manipulation in the system’s code: This can lead to security threats to the network, attracting bad actors.
  • Eliminating miners’ incentives will mean they earn less income: Reduced income hurts the community, organization, and individual. Miners may even resort to dubious activities to earn more.

Can EIP give a boost to Ethereum 2.0?

Let’s conclude with a discussion on how EIP will influence the growth of the Ethereum network. It is evident that the proposal aims to improve Ethereum by reducing the cost of supply, boosting Ethereum’s performance, and modestly reducing the rate of ETH inflation. EIP-1559 also aims to increase user predictability of gas prices in the future. Though this will not guarantee lower prices, customers will be able to make stable predictions.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user’s own risk.

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