Roy M. Avila
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Roy M. Avila

Ethereum EIP 1559 Explained

Thanks to @hashoshi4

Review Notes: Excerpts from Hashoshi Productions Ethereum EIP 1559 explained! (don’t believe everything you read online), August 3, 2021, Allowable Time 12.54

'The base fee is a huge improvement from the first price auction; it's predictable and efficient so that users are less likely to overpay exorbitantly in fees.'

The London hard fork will land on the Ethereum Mainnet on block 12,965,000.

ETH Implements London Hard Fork. The Ethereum Block 12965000 arrived at 12:33 PM UTC on Aug. 5, 2021, implementing the London hard fork. The EIPs included in the London hard fork are: EIP-1559, EIP-3198, EIP-3529, EIP-3541, EIP-3554. Exchanges like Binance, Coinbase, and OKEx have temporarily suspended the ETH & ERC-20 token deposits and withdrawal for the upgrade. — Messari.io

There are two significant impacts on the Ethereum network for users. First, it will provide a more predictable fee payment experience with far fewer instances of gross fee overpayment for transactions on Ethereum. Second, the new fee market’s base fee burning mechanism will enforce a drastic reduction in the issuance or inflation of ETHER into supply, even potentially making the supply deflationary where the issuance per block is burned less in fees.

The utility fees called gas are measured and paid in small denominations of ETHER called Guay. Gas is what users pay to have their transactions validated by the Ethereum network and pays for the resources used by that transaction. Smart contract execution transactions, of course, use more gas because they require computation and even potentially storage on the network, which comes with the price.

Each block of transactions has a gas limit that determines how many transactions can fit into one block. Miners get paid out in ETHER for the gas fees paid in transactions that they validate. A user sending a transaction today is a buyer or a bidder, and miners are selling or auctioning gas to you, which is capacity on the network.

Ethereum’s fee market today is based on something called a first-price auction mechanism. Users submit transactions with a maximum amount of gas a ceiling they’re willing to pay on a transaction; this is called a gas limit. Ethereum EIP 1559 is flipping this entire fee mechanism on its head, and it’s introducing a predictable base fee mechanism referred to as a fixed price sale model instead of a fixed price auction.

Second-tier of fee that one can pay on top of that base fee to get their transaction processed faster. The base fee is a tip on top of the base fee as an additional payment to miners who validate these transactions in priority. Supposedly how ETHER is going to the moon because of EIP-1559? The base fees paid will be burnt from the supply of ETHER when those transactions into blocks are consummated and effectively removed from the supply.

ETHER supply increases are in the block subsidy or the flat reward of two ETHER that a miner gets for making a block on the network; this is a new supply offset by the base fees burned for every block. So the first step will be seeing what type of base fees and congestion there is on the network. Then, the amount we burn per block against that subsidy will determine how much ETHER is burnt against the issuance from that block subsidy and subsequently-the step to why we’re going to get to deflationary ETH quickly.

Concerns that miners will revolt against this hard fork due to the lower potential rewards with the base fee burn because they usually were getting those before in rewards. The new economic models will affect minor revenue definitively long term. However, the bet is that the total loss in miner revenue is expected maybe in the 20% or 30% range. That base fee will outweigh the increase in ETHER’s price and the opportunity cost of shirking long-term revenue opportunities on the network.

Network conditions will be measured by how full the previous block of transactions is relative to the baseline or target capacity, and fees will increase by a magnitude of 1.125 x for each 100 capacity block. Users can then pay tips on top of that base fee for priority space in those blocks. The increasing fees intended to create economic pressure to keep the network at its ideal capacity of 50 full blocks it’s at that 12.5 million gas range. Finally, the base fees paid for each block of transactions will be burned from ETHER supply reducing the inflation rate over time and potentially making ETHER deflationary.

For the user, each wallet they use will have a more standard method for fee calculation. The protocol itself will quote a price that the user can determine is acceptable or not in a given period. The gas paid for transactions is just a side effect of the transparency and predictability, not the protocol’s design itself. The upgrade is not a bona fide solution to high fees. Ethereum and the core Ethereum team have made it very clear. The case in write-ups and research making it very clear that the only true solution to the gas cost problem is more scalability which will come in the short term with roll-ups in layer twos and the long-term with Ethereum 2.0.

For clarity, there is no solution to high gas fees and Ethereum for the long term except for more scalability. EIP 1559 will not fix this.

The bottom line of the TLDR (or TL;DR) is a common internet acronym for “Too Long; Didn’t Read.” A much-needed user experience and economic element that needed to change in the Ethereum network.

Thanks to @hashoshi4

#Hashoshi #Cryptocurrency #Ethereum #Bitcoin #Cardano #ADA #InternetComputer #GraphProtocol #Etherium #Blockchain #Sovryn #Crypto #Tokens #Energy #Networks #Cryptocurrencies #NFT #Stahks #Gold #Technology #Stocks #Stockmarkets

Originally published on August 5, 2021 at https://www.linkedin.com.

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Roy M. Avila

Roy M. Avila

A technology enthusiast and an advocate long time promoter towards a healthy wellness lifestyle.

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