Judging from the latest data on the Ethereum chain, the EIP-1559 update, also known as the London Fork, has resulted in four phenomena that seemingly go against market intuition.
First of all, Ethereum network fees have not dropped significantly. The reason is that the “tax distortion” model used commonly in the market does not apply to the gas trading market, and the primary motivation behind EIP-1559 was to improve efficiency rather than lower prices.
Secondly, EIP-1559 can tactically resolve transaction congestion problems. Since the London Fork, block capacity has increased significantly, which can alleviate transaction congestion problems to a certain extent. The main reason behind the increase in block capacity is the particular Base Fee price formula, which increases the average block utilization rate from 50% to 51.7%.
Thirdly, EIP-1559 did not cause Ethereum’s deflation, but it did succeed in slowing down its inflation, according to the cryptocurrency’s daily output and burn data.
Finally, after the London Fork, mining income did not significantly drop. Even if the price increase of ETH is excluded, mining income has not decreased significantly. The main reason is that more than 80% of the transactions in the current block are generated in the original transaction (Legacy) mode, while the EIP-1559 transaction mode only accounts for about 20%.
Huobi Research Institute William
It has been a few weeks since EIP-1559 went online. Frankly speaking, even though the upgrade went through, EIP-1559 is still full of controversy. This includes the impact of EIP-1559 on handling fees, miners’ income, ETH prices, and so on. What is the real situation? We can explore these disputes by closely examining the data on the Ethereum chain.
On-chain data observation #1: The handling fees have not significantly dropped. The purpose of the EIP-1559 update was to improve efficiency, rather than reduce handling fees.
A big controversy of EIP-1559 is whether the proposal can reduce Ethereum’s transaction fees. According to data on the Ethereum chain, after the successful London Fork on August 5th, handling fees for transaction fees denominated in ETH have not significantly dropped. When denominated in US dollars, the handling fees have even risen to a certain extent, due to the increase in the price of ETH.
There may be different opinions: the reform of the main gas auction mechanism induced by EIP-1559 affects the gas auction price, not the simple handling fee. Similarly, we can see from the data on the chain that the gas auction price did not change significantly after the London Fork.
The above results are consistent with our previous research predictions. The reason is that the main purpose of the EIP-1559 proposal was to improve efficiency, not to reduce the price of handling fees. EIP-1559 was designed primarily to improve the inefficiency of gas transactions for the following four aspects:
(1) The mismatch between the volatility of the transaction fee level and the social costs of the transaction
(2) Unnecessary delays for users
(3) Low efficiency of the first price auction
(4) Instability of the blockchain without block rewards
It is worth mentioning that when discussing the impact of EIP-1559, some users in the Chinese community have used tax distortion theories to analyze the problem, and deduce that EIP-1995 may increase gas prices, reduce the gas supply and cause problems such as deadweight losses.
However, the problem with the above analysis is that it ignores the peculiarities of Ethereum Gas transactions. Traditional analysis of tax distortion effects assumes that all firms are competing firms. At this time, the market supply curve is derived from the firm’s marginal cost curve, and the marginal cost curve of ordinary firms is a curve that slopes to the right, so the supply curve in tax theory is a curve that slopes to the right (see the figure below).
The special feature of the gas transaction is that after the miners win the bookkeeping competition in each block, they obtain the monopoly of the gas auction. The monopolists do not have supply curves. The way that monopolists determine price or output is that marginal revenue (MR) is equal to marginal cost (MC). The special feature of miners is that the marginal costs of obtaining transaction fees are almost zero. Because the main source of income for miners is block rewards, marginal costs in the short term are mostly electricity bills, so the impact of a transaction on miners’ marginal costs is negligible.
In addition, due to the existence of the auction mechanism, miners can achieve first-level price discrimination against users; that is, miners can set different prices for each unit of Gas according to the user’s willingness to pay. Therefore, as long as the gas price (P) of each user is higher than the miner’s marginal cost (MC=0), then the miner will pack the transaction until the block gas limit is reached. Even if miners can collect only a small amount of TIP or no TIP after the implementation of EIP-1559, miners are still willing to package transactions (TIP≥MC=0). This also explains why miners are still willing to package transactions, even if the Base Fee has been destroyed after the implementation of EIP-1559.
On the other hand, regarding Base Fees as a kind of “tax” is biased. Taxes add a value to the original base price (P+t), which is an additional cost; EIP-1559 is splitting the original price into two parts (P = Base Fee + TIP) . Therefore, the Base Fees under EIP-1559 cannot be regarded as a tax, because they do not give a cost burden to both the supplier and buyer. The only change that EIP-1559 induces is that the highest price that users are willing to pay to miners has changed from the previous Gas Price to TIP.
As shown by the data on the chain, we draw several important conclusions under the tax distortion theory: an increase in handling fees, decrease in gas supply, and the appearance of deadweight losses never actually came to fruition.
On-chain data observation #2: EIP-1559 can tactically alleviate transaction congestion problems
Since the London Fork, another interesting statistic we’ve seen is that the daily average gas consumption of Ethereum has increased significantly. The average daily gas consumption has risen from 92 billion to current 100 billion, which also implies that block capacity has increased significantly after the London Fork, and transaction congestion problems have been alleviated to a certain extent.
So, what is the source of the nearly 10% increase in Ethereum’s block capacity? — — EIP-1559’s variable block size design.
As we all know, EIP-1559 uses two parameters to control block size: Gas limit and gas
target. Gas target is an ideal block space that Ethereum wants to maintain for a long time. It is 50% of the upper limit of Gas in value, and the average block utilization is maintained at 50%. In order to achieve this goal, EIP-1559 uses Base Fee to adjust:
Among them, b stands for Base Fee, t stands for block height, T stands for block size, the target block load is T/2, and g stands for the number of transactions included in the block. Since g depends on the Base fee b, we will gt | bt represents the number of transactions included in Bt when the basic fee is equal to bt. D is the adjustment factor, and the current setting is d=0.125.
However, the above formula design introduces an interesting mathematical phenomenon: suppose that there are now four blocks: the usage of the first block is 50%, the usage of the second block is 0%, and the usage of the third block is 100%. Assuming that the initial Base Fee is 1, what is the Base Fee of the fourth block? The details are shown in the following table:
It can be seen from the above table that although the average usage rate of the first three blocks is 50%, under the adjustment of the algorithm, the Base Fee of the fourth block is 63/64 instead of 1. So, what is the equilibrium condition to keep the Base Fee constant in a volatile state? This requires that the ratio of full blocks to empty blocks is -ln(7/8)/ln(9/8)=1.134, that is, the ratio of full blocks to all blocks is 53.13%, and the ratio of empty blocks to all blocks is 46.87%, or the average utilization rate of each block is 53.13%; that is, the average gas consumption of each block will increase by about 6%.
Of course, the above estimates are only rough calculations. From the actual data on the chain, after the London fork, the average gas consumption per block rose to 15.5 million; that is, the average block utilization rate was 51.7%, and the actual increase rate was 3.3%.
The above reflects the main reason for block capacity increases after the EIP-1559 upgrade. This is not the only reason for the increase in the average daily gas consumption of Ethereum. At present, some data studies have found that the London Fork has delayed the arrival of the ice age and shortened the block generation time, which is also an important reason why average daily gas consumption has increased.
It should be emphasized that EIP-1559 cannot fundamentally solve the current situation of Ethereum network congestion. After all, EIP-1559 only expands each block by 3%. The fundamental measure to solve the congestion problem lies in the expansion plan of Ethereum Layer 2, sharing technology and so on.
On-chain data observation #3: EIP-1559 did not cause Ethereum’s deflation, but it did successfully slow down its inflation
Another focus of EIP-1559 that has attracted the attention of the market is that the destruction of Base Fees may introduce deflationary effects to Ethereum. However, judging from the actual data, EIP-1559 did not cause deflation, but rather, it reduced its inflation, which makes the actual circulation of ETH significantly slower than that before the “London Fork”.
There are three main sources of Ethereum supply: one is Block Rewards, which currently provides 2 ETH rewards per block; and the other is Uncle Rewards; lastly, there are Uncle Incl Rewards (the rewards for including uncle blocks in the confirmed block). The daily output is about 13,000–13,500 ETH, and the amount of ETH burned by EIP-1559 is only about 5,000 ETH per day. Therefore, judging from the current data, EIP-1559 has not be able to bring about deflation.
On-chain data observation #4: Miners’ income has not significantly declined
Before the London Fork, many people predicted that EIP-1559 would reduce miners’ income. However, it is surprising that the income of miners did not show a significant decline after the London Fork, and that it even increased, when denominated in US dollars. This is inconsistent with market intuition, and so we ask: what’s the reason?
From the data on the Ethereum chain, when denominated in U.S. dollars or USDT, miners’ income did rise after the “London Fork” due to increases in the price of ETH; but if the factors affecting the price of ETH were removed and the price was denominated in ETH, we found that miners’ income (or handling fees) even declined slightly.
However, new questions arise. Why is there only a “slight” decline in miners’ income here? After all, the Base Fee, which accounts for most of the handling fee, has been destroyed. In theory, it is reasonable that the handling fee should drop significantly.
From the analysis of the Ethereum miners’ income composition, we can see that after the London Fork, most of the fees were still paid in the original mode. This is also the reason why miners’ incomes have only declined “slightly”, even if they are denominated in ETH.
EtherScan data further supports the above conclusions: after the EIP-1559 upgrade, the transactions in each block retained three modes: one was the EIP-1559 mode which we are familiar with, and the other was the Access List mode, the main source of this transaction mode in EIP-2930. The Access List mode was designed to solve the main network transaction blocked by EIP-292; aside from this, the other is the original transaction (Legacy) mode.
Referring to 《1559 Cheatsheet for Implementers》, the original transaction mode here is not the original first-price auction mode, but the gas price is interpreted as maxFeePerGas, baseFeePERgas and maxPriorityFeePerGas, where maxFeePerGas represents the maximum amount that the user is willing to pay. baseFeePerGas will be destroyed, and maxPriorityFeePerGas is owned by the miner.
For example, suppose that the Base Fee is 100 gwei:
√ EIP-1559 transaction mode: The user sends a transaction with a GAS Price of 250gwei and a TIP of 5gwei. The user will pay 100+5=105 gwei, of which 100 gwei will be burned, 5 gwei will go to the miners, and the remaining 145 gwei will be returned to the user.
√ Legacy mode: The user sends a transaction with a GAS Price of 250 gwei. At this time, maxPriorityFeePerGas will be sent out with 250 gwei, 100 gwei will be burned, and 250–100=150 gwei will be owned by the miner
According to Etherscan data, more than 80% of the transactions in the current block are generated in the original transaction (Legacy) mode, while the EIP-1559 transaction mode only accounts for about 20%. This is the main reason why miners’ fee income has only dropped “slightly”.