What is Ethereum Improvement Plan (EIP 1559)

By January 15, 2022January 30th, 20225 minute read
What is Ethereum Improvement Plan (EIP 1559)
Note: This blog is written by an external blogger. The views and opinions expressed within this post belong solely to the author.

Ethereum improvement plans or proposals describe the Ethereum platform’s standards that include protocol specifications, standards, and APIs. EIP 1559 proposes modifications to the Ethereum fee market, including the following:

  • A “long-term average target” (equivalent to the present gas restriction) and a “hard per-block cap” to replace the current gas limit (twice the current gas limit)
  • Participants are needed to pay a BASE FEE (which is burned), which is modified on a block-by-block basis to keep average block gas usage near the current gas limit.

Common misconceptions about EIP-1559

Before diving into EIP-1559 in-depth, it’s important to clear up a few misconceptions. To begin with, EIP-1559 does not make Ethereum transactions cheaper in the long run. The demand for submitting a transaction vs the availability of accessible block space determines how much gas is charged. 

This EIP merely aids in smoothing gas prices by enabling the block size to somewhat increase amid surges in demand. It doesn’t improve the chain’s scalability and, as a result, isn’t a long-term option for lowering gas prices.

Second, while every transaction burns some ETH, this does not imply that enough ETH will be burned to offset the current issuance rate. The present ETH1 (Proof of Work) and ETH2 (Proof of Stake) must be offset by a base fee of 150 Gwei and 20 Gwei, respectively.

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Why is EIP 1559 beneficial?

The following are some of the advantages of EIP 1559:

  • More accurate estimate of transaction fees.
  • ETH, the Ethereum network, and its users have a symbiotic connection.
  • Transactions get included in a more trustworthy manner.

What is Ethereum’s London Hard Fork?

There is a set of five Ethereum improvement proposals, referred to as the London Hard Fork. To change the speed and incentivization of Ethereum mining, EIP-1559 is included in the London hard fork.

As ETH is an inflationary cryptocurrency, there is no limit on the Ethereum count. Brand new coins are rewarded to miners every time they validate a block. They are compensated with the transaction fees that users pay. Once the update is rolled out, miners will not receive income from transaction fees.

Current Gas Price Auction

Currently, Ethereum values transactions using a first-price auction. This means – users who bid the highest prices are more likely to have their transactions included first. The major flaw in this strategy is that gas prices can swing drastically due to abrupt spikes in demand for Ethereum’s limited block space. 

Are Today’s Fee Markets Inefficient?

Yes. The gap between average and 10th percentile gas price in a normal block is about 3x for median and 5-8x for mean. People pay excessively when they don’t have to.

Everyone who does not overpay experiences a 1-2 minute or more delay, and this delay does not assist anyone. The total load on the chain is the same whether a particular unit of load arrives at time N or time N + 60. 

Under normal circumstances, there is no actual societal benefit for users “expressing a low time preference”. In the free market mechanism, it is pure loss. We all only benefit from adding more transactions right away, as EIP 1559 enables.

Why not fix the first-price auction inefficiency by using a second price (or kth price auction)?

In a typical economic analysis, kth-price auctions (in which everyone pays the lowest gas price in the block) are certainly “efficient,” but they fault being subject to collusion.

Of course, you should utilize the highest gas price not included in the block in theory; but, considering that most Ethereum blocks comprise hundreds of transactions, the difference is minimal in practice.

EIP-1559  – Significant Changes

Base fee, priority fee, and max fee 

The base fee is the minimum gas price that a transaction must at, to be included in a block. This variable established by the protocol is part of the block header and represents the percentage of the entire fee that is burned.

Priority fee is the amount of gas the user is willing to pay the miner to complete the transaction. The user sets this value, which is then paid to the miner as part of the transaction (mostly, the default tip will be two gwei).

The highest total gas price that the user is ready to pay for the transaction is the maximum fee (per gas). This is controlled by the user and is included in the transaction.

A transaction will only be legal when EIP-1559 is implemented if the Max Fee is larger than the Base Fee + the Priority Fee. Any unused funds are returned to the user.

Refund = Maximum Fee – (Base Fee + Priority Fee)

As a result, users will have far greater confidence when completing a transaction because they will only need to include enough funds to cover the Base Fee and a small Priority Fee for their transaction to be accepted. The remaining is reimbursed to the user rather than given to a miner, and the user does not have to worry about overbidding on gas costs.

Variable block size

By allowing the protocol to increase accessible block space temporarily, variable block sizes serve to smooth out gas prices. This leads to a smoother increase in gas costs between blocks in the short term.

Source

Burning of the base fee

The miner receives the Priority Fee, while the Base Fee is burned and removed from circulation. The fundamental reason for this is because if miners were paid the Base Fee, they would be enticed to keep it as high as possible to maximize earnings (and could also spam the network with high transaction fees that could be later recouped if they mined a block). It ensures that miners are unconcerned about this by burning the Base Fee.

With EIP-1559, a small amount of ETH must be included as the Base Fee to accept the transaction as genuine, resulting in a more healthy relationship between the Ethereum network and the ETH asset.

As you can see, EIP-1559 can substantially improve the user experience on Ethereum when it comes to transaction processing. Of course, most people (including ourselves) prefer to focus on the fee burn component of EIP-1559, but the total benefits of EIP-1559 go much beyond the fee burn and will help end-users.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Shashank

Shashank

Shashank is an ETH maximalist who bought his first crypto in 2013. He's also a digital marketing entrepreneur, a cosmology enthusiast, and DJ.

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