EIP-1559 for Ethereum — was it really worth it?

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Etheros

5 min readOct 20, 2022

EIP-1559 for Ethereum

Ethereum Improvement Proposal (EIP-1559), due to be included with the ‘London’ update in July, has prompted as much excitement as fear and panic.

On the surface, EIP-1559 is nothing more than a change to Ethereum’s gas fee structure. To spice things up, the update has also been labelled as a decreasing Ethereum supply system or burning mechanism, as it destroys Ethers used in transaction fees, making the cryptocurrency deflationary and perhaps more valuable further into the future. Limiting Ether inflation will make the digital asset as attractive as Bitcoin, meaning its purchasing power will increase over time.

What is the functionality of Ethereum?

However, the significance of the EIP-1559 proposal is mainly based on determining charges for uncontrolled gas. The update had already been in development for some time, but its moment for implementation could not have come at a better time. Ethereum’s incredibly high transaction fees are a result of the network being the most widely used blockchain in the world.

This is partly because of the functionality of smart contracts, in which by comparison the Bitcoin blockchain is limited in this aspect.
Ethereum’s functionality has led to it being used as the foundation for several technology booms in the cryptocurrency sector: first these were ICOs and STOs, then decentralized finance, and now NFT.

The significance of EIP-1559 for the miners

To better understand the significance of EIP-1559, we need to step back and look at the current gas pricing model and why it needs to be changed for the good of the ecosystem. Although it is worth noting that the upcoming update is not ideal for all miners.

Ethereum gas pricing model

Every form of activity performed on Ethereum is recorded on the blockchain, and the accompanying change is considered a transaction. Each transaction comes with a cost, which serves two purposes:

Transaction costs are meant to discourage users with bad intentions from spamming the network.

2. They are meant to encourage miners, who maintain the network by confirming transactions, to continue working for the protocol.

The Ethereum network is currently using an auction system to determine the gas fee. Essentially, this means that there is no set transaction fee, and the actual amount paid depends on factors that include all traffic on the network.

In theory, users who bid to pay more will have their transactions prioritized and receive early confirmation. But as with any auction system, the price can rise really high. In recent weeks, transaction fees on Etherum have reached astronomical figures. Dozens of dollars to transfer ETH from wallet to wallet? No problem. Several hundred USD for adding liquidity in DeFi? Normal.

This surge in transaction fees in relation to values that are unreasonable, to say the least, has naturally benefited the miners, who for obvious reasons want the status quo to remain unchanged. It is claimed that updating EIP-1559 would reduce transaction costs by up to 90%! 10 times fewer earnings for the statistical miner! So this is not ideal news for them.

What will change with EIP-1559?

The EIP-1559 update proposes to use flexible block sizes instead of fixed block sizes, which is the norm in Proof-of-Work systems. To this end, EIP-1559 uses a two-tier system consisting of a base fee and tips. The base charge will be payable on the Ether’s network, with the price constantly varying according to network congestion. The new proposal aims to keep network utilization at 50% or lower. If network utilization exceeds this threshold, the base charge will also increase. This predictable pricing model aims to remove the burden of fixing the price from users and hand it over to automatic setting by portfolio providers. The base fee would then be burned once collected, meaning that miners will no longer charge transaction fees. This would make Ether a deflationary asset, sustaining its purchasing power over time.

Tipping is slightly different from a base fee in the sense that it is not mandatory. And unlike base fees, which must be burned, tips are held by miners. Under EIP-1559, blocks will not be completely full, giving miners space to allocate transactions to users who would be willing to pay a premium to include their transactions in subsequent blocks. However, miners will have no control over the fee structure and have made no secret of their disappointment at this.

Naturally, no one is ready to let go of their piece of the pie — the same goes for Ethereum miners. In February alone, miners’ revenues reached a record $1.3 billion, half of which comes from transaction fees. Miners are campaigning against the EIP-1559 proposal because it is estimated that it will cost as much as 50% of their revenue.

The issue has gone so far that some pools are threatening to join together against the update as a show of force. While this may not encourage them to launch a 51% attack on the network, the mere possibility that they could do so is likely to give Ethereum developers many sleepless nights. It also shows that blockchain networks are at the mercy of large mining pools. And if only ethical and economic considerations prevent them from using hash rates for their own nefarious gain, then blockchains may be far from secure. Whoever has the computing power controls the blockchain.

The bright side for all Ethereum users

On the other hand, the loss of miners is a win for DeFi projects. The new fee structure will allow DeFi projects to pay less for transactions on the Ethereum network. And in the long run, it will reduce the number of projects migrating to other blockchains. Someone has to lose in order for someone to gain.

All positive changes reducing fees or improving the scalability of the network are crucial for projects like Etheros as a groundbreaking metaverse is also based on Binance Smart Chain (in addition to Ethereum). In addition to the internal transactions carried out on the Etheros platform, users will have to decide which blockchain will be the main one for the platform and thus correspond to their expectations. Therefore, it brings even more hopes that The EIP-1559 update will enter into an effective competition and eliminate the bugs that cause an exodus of users to BSC.