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Explaining EIP-1559

With the Story of the Crypto Village

Overview

The much-anticipated Ethereum London Upgrade is expected to be officially launched on the mainnet on August 5 at the height of block 12965000. The EIP-1559 included in the London Upgrade is probably the most popular and controversial proposal before the coming of ETH 2.0. The core request is to modify the ETH fee mechanism by changing the original First-price Auction system conducted by users to a model that combines the Base Fee regulated by the protocol + User-Optional Tip.

In this article, we will try to explain what EIP-1559 is with a story that happened in the Crypto Village.

The ferry of crypto village

Crypto Village is a beautiful village surrounded by mountains on three sides and facing the water, and the only way to get out of the village is by taking the boat through a ferry crossing by the river.

The ferry was set up mainly to serve the villagers. At that time, there were very few villagers going out of the village for business and very few people took the boat. The village committee decided that the village would provide an allowance to subsidize the boatman, Bob. However, this soon changed as demand for ferry services increased. When getting together out of the village to go to the market, the villagers discovered that they need to take the boat in batches. It was necessary to formulate a rule of who left first and later. At that time, the village committee chose the seemingly fairest first-price auction principle without much hesitation. Every villager who wanted to leave the village quoted Bob privately and the more you paid, the higher your priority to use it first.

Dissatisfaction with the ferry

The ferry has been open for more than 5 years. With the hard work of the villagers, their lives are prosperous, and the demand to go out is also increasing. There is often a queue at the ferry and the boat ride cost has increased from $1 to about $10 for a boat ride. The village committee commissioned the village accountant Alice to investigate, and found that everyone had opinions on the ferry:

Jack is the richest man in the village. He finds that he sometimes cannot not take a boat when he pays $5. So he directly pays $10 each time to take the boat. Although he is rich and does not worry too much about the money, he is indignant about the money he spent when hearing that people on the same boat spend less money.

Roy is a village fruit farmer. A $10 bid is required for him to ensure that he takes the boat first to maintain the freshness of the fruit, although he is not rich. The boat cost is now the biggest cost of his fruit business.
Charlie is a student and doesn’t have much money, so she can only spend $3 each time, and waits at the ferry for several hours to take the boat.
Tommy is from a poor household in the village. He can only afford $1 for the boat and it is said that he has not been out of the village for 2 years.
At the same time, the boatman Bob has made a lot of money and has built up a 3-story house.

Alice makes another calculation of how much money Bob has made.

Suppose there are now 10 villagers who want to take a boat, and their bids range from $1 to $10. Then, 5 villagers spend $6 to $10 to take the boat first and another 5 villagers spend $1 to $5 to take later. A total of $55 is spent by the 10 villagers.
But the villagers who spend over $6 can take the boat first as long as they all spent $6. The villagers who spend less than $6 can take the boat secondly as long as they all spent $1. A total of $35 is spent by the 10 villagers.
Furthermore, the final result is the same when the first 5 villagers spend $2 and the last 5 villagers spent $1. In this scenario, a total of $15 is spent by the 10 villagers.
Alice discovers that blind, uncoordinated bidding behavior amongst the villagers is causing them to spend more money than they need to.

The EIP-1559 proposal

Although several new ferries in the second phase of the crypto village are already under construction, and the speedboats ordered from the city are coming soon, there is increasing dissatisfaction in the meantime at the situation. More and more villagers are complaining that they would rather move out of the village. The village committee decides to change the existing system and asked Alice to come up with a plan. Alice calls this plan EIP-1559.
EIP-1559 stipulates that the village committee will dynamically set a unified basic cost for villagers to take a boat rather than someone paying more to take it first. Those who are willing to pay to take, and those who are unwilling will wait until the basic cost is reduced to their psychologically acceptable price. The rules for the village committee to adjust the basic cost are as follows: the village committee allocates funds to Bob to transform the ferry to accommodate at most 10 people. The goal of basic cost adjustment is to accommodate 5 people (50%) on the ferry each time. Because this is the most economical based on fuel consumption and depreciation. When the number of people taking the boat at one time is more than 5, the basic cost will increase afterward, and vice versa.
In addition, if the ferry is very busy for a while, there are more than 10 people on the boat each time and some villagers are anxious to leave the village. The village committee agreed that the villagers could tip Bob to take the boat first considering the situation.
At the same time, the proposal also considers a loophole. The condition that Bob arranges his relatives to take turns taking the boat to increase the basic cost. If the boat is filled with 10 people each time, the basic cost will keep increasing and the basic cost paid by Bob’s relatives returns to Bob’s pocket, while the basic cost of other people increases. Bob would still earn more than the normal situation. EIP-1559 stipulates that all basic costs are no longer given to Bob and used to build the village to cope with this loophole. Bob can only get the original village allowance and the tips given by people.

The villagers react to EIP 1559

Once EIP-1559 is put forward, Bob is certainly the most fiercely opposed, because he has to give up a large part of boat income into the village construction fund. Some villagers also object to the proposal because they feel that there was still a tip. If the basic boat cost tends to zero, it turns to tips later and changes nothing from before. However, in general, most villagers still support the proposal:

  • The transition from blind bidding to the basic boat fee + tipping model is likely to make tipping a boat a niche behavior, not a fixed behavior.
  • The basic ferry cost allows everyone to have a clearer psychological expectation about when to take the boat rather than guessing. If they feel it is too expensive, they need to wait for the basic ferry price to be reduced.
  • 50% more seats could be added during busy times, which is not a vast expansion of capacity, but better than nothing.
  • The basic costs will be used for the construction of the village so that the villagers will have more confidence about the future of the Crypto Village.

After much deliberation, the village committee is determined to launch EIP-1559 by because most of the villagers still hold positive opinions. However, it needs time to verify what role the proposal will play and what unintended effects it might cause.

Understanding the EIP 1559

The story of the Crypto Village is a parable for the story of EIP 1559. I believe that you would have a more intuitive understanding of what EIP-1559 is.
Here, we list some concepts and terms that correspond to the story in the village:

  • Ferry out of the village = transaction on the chain
  • Village Committee = Ethereum Foundation
  • Village allowance = block reward
  • Boatman Bob = Miner
  • Basic costs for village construction = Basic costs that are burned to open up deflationary paths to Ethereum and increase the value storage narrative
  • Crypto Village II = ETH 2.0
  • Speedboat = Layer 2

Outlook for the future

Today, there are many different voices on EIP-1559 in the community, questioning that such a major change goes against the original intention of the crypto community of ‘Code is Law.’ We believe that doing more may be wrong, but there will be no progress if we do not do. In the early stages of building the blockchain industry, when the starting intention is benevolent and most of the community is supportive, not being bound by mental frameworks and being pragmatic enough to make some positive changes will likely do more good than harm to the development of the industry as a whole.

References

Tim Roughgarden — An Economic Analysis of EIP-1559

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DeGate Team

DeGate Team

A DAO-centric, decentralised limit trading protocol built on Ethereum. 🚀