In August 2021, Ethereum released the London hard fork upgrade. The five Ethereum Improvement Proposals (EIPs) contributed to the upgrade. One of them was the EIP-1559 which aimed to alter how Ethereum computes and handles network transaction fees (also known as “gas fees”) and rewards miners during times of high or low network congestion.

In this blog, we will brief you about the EIP-1559 protocol. Keep on reading!

What is the EIP-1559 protocol?

On Ethereum, network fees were managed using a “first-price auction,” in which participants made bids to reward miners, with the highest bidder taking the prize. This means that a user must submit higher bids to give miners a greater incentive if they want their transaction to be completed more quickly. Lower bids, on the other hand, may require more time for their transactions to be included in a block.

By eliminating the auction and replacing it with a base fee that will be charged for all network transactions, the EIP-1559 completely revamped this system. Additionally, users will be able to select a “priority fee” to reward miners. In essence, the priority fee serves as a tip to motivate speedier inclusion by miners.

Benefits of EIP-1559 protocol

• The improved user experience that EIP-1559 offers are one of its best features.
• It has not just enhanced the user experience but also cut down on the unnecessary amount of money users are charged.
• The fee is partially burnt by EIP-1559, lowering Ethereum’s inflation rate. This could be a reason for Ethereum’s increased value. 
• The Ethereum system has become more secure thanks to EIP-1559. One could say it is a long-term strategy to combat denial of service attacks. The characteristic that makes attacking the system expensive is present in EIP-1559.
• The miners’ revenue increased significantly after the EIP-1559 was put into effect.

What was the issue before the EIP-1559 protocol?

Ethereum used the first-price auction method to set the price of transaction fees. Using the method, users have to send a transaction with fee bids—also known as gas prices. The transactions with the highest bid are those that miners decide to include in the block. The selected transactions by miners were required to pay the specified bid amount.

This bidding system caused system congestion and a rise in the network’s gas prices. This might also result in some users on the same block having to pay higher transaction fees (gas fees).

What did EIP-1559 do?

The first-price auction method for calculating the fee for a transaction has been eliminated by EIP-1559. In the EIP-1559 update, a base fee is required for all transactions to be included in the following block, and a priority fee that accelerates transaction processing. The base fee fluctuates and is eventually burned in response to network congestion.

The user pays a fee with the transaction that is more than the base fee. Users can set a fee cap because the base fee varies depending on the level of network congestion. After it is included, the users only pay the difference between the final base fee and the fee cap.

Since the base fee is the minimal price to be added in the following block, these changes to the transaction fee mechanism allowed users to estimate cost more accurately. Overall, as a result, fewer users overpaid for transactions.

Final words

Tokens created on ERC standards and the Ethereum network are designed to operate more efficiently thanks to Ethereum Improvement Proposals (EIPs). For example, the EIP-1559 protocol aimed to fix the problem of higher gas fees for Ethereum users during intense network activity.

Two different types of fees have been introduced to Ethereum transactions by the EIP-1559 protocol. The first is a base fee, which the ETH protocol automatically adjusts based on network congestion and burns when a transaction is complete. The second, known as a priority fee, is used to reward the miners.

EIP-1559 discouraged miners from altering the fee for bigger rewards because of the two-fee structure and the inclusion of the burning mechanism. In fact, the EIP-1559 marks a turning point in the history of the Ethereum network and is quite advantageous for crypto users.