Ethereum London Hard Fork Explained
Ethereum Will Take Over the World with the London Hard Fork (and future upgrades)
Here is the video version!
Formally called Ethereum Improvement Proposal 1559 (EIP-1559); reformed the transaction fee market, along with changes to how gas refunds are handled and the Ice Age schedule.
In summary, it’s a transaction pricing mechanism that includes:
- fixed-per-block network fee that is burned and
- dynamically expands/contracts block sizes to deal with transient congestion.
There is a base fee per gas in protocol, which can move up or down each block according to a formula which is a function of gas used in parent block and gas target (block gas limit divided by elasticity multiplier) of parent block.
Dynamic Block Sizes and Dynamic Fees: The algorithm results in the base fee per gas increasing when blocks are above the gas target, and decreasing when blocks are below the gas target.
The base fee per gas is burned. (decreasing supply, making Ethereum a deflationary currency)
Transactions specify the maximum fee per gas they are willing to give to miners to incentivize them to include their transaction (aka: priority fee).
Transactions also specify the maximum fee per gas they are willing to pay total (aka: max fee), which covers both the priority fee and the block’s network fee per gas (aka: base fee).
Basically, transactions specify max fee, and max fee = priority fee + base fee
The transaction will always pay the base fee per gas of the block it was included in, and they will pay the priority fee per gas set in the transaction, as long as the combined amount of the two fees doesn’t exceed the transaction’s maximum fee per gas.
Motivation behind the London Hard Fork
The main motivations are the following:
- Mismatch between volatility of transaction fee levels and social cost of transactions
- Needless delays for users
- Inefficiencies of first price auctions
- Instability of blockchains with no block reward
An important aspect of this fee system is that miners only get to keep the priority fee. The base fee is always burned (i.e. it is destroyed by the protocol).
This ensures that only ETH can ever be used to pay for transactions on Ethereum, cementing the economic value of ETH within the Ethereum platform and reducing risks associated with miner extractable value (MEV).
Additionally, this burn counterbalances Ethereum inflation while still giving the block reward and priority fee to miners.
Finally, ensuring the miner of a block does not receive the base fee is important because it removes the miner’s incentive to manipulate the fee in order to extract more fees from users.
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