Everything You Need To Know About EIP-1559 | EIP1559 Explained
EIP-1559 is probably the most anticipated (and controversial) Ethereum update this side of Eth2, but what exactly is it, why are people so excited or concerned about it, and how will it affect you?
Overview
EIP-1559 is a proposal to dramatically change the way transaction fees work in Ethereum. While it should bring a number of benefits, including one side effect that’s really stolen the limelight and got many Ethereans very excited, the update’s primary objective is simply improving Ethereum’s user experience. 1559 should make it far easier for users, wallets, and DApps to estimate the size of the fee they should pay to have their transaction promptly confirmed. That means users won’t face the present-day issues of accidentally underpaying and having to wait hours for transactions to be confirmed, or overpaying to ensure a transaction is included in the soonest possible block.
1559 achieves this by making two major changes: first, it introduces an explicit minimum fee called the Base Fee into each block and requires transactions to pay that fee to be included. Second, it introduces a degree of flexibility into the size of blocks, allowing miners to create blocks up to twice the size limit if there’s enough demand for that.
The Base Fee will change from block to block based on how full or how empty the previous block was. If a block is more than 100% full, the Base Fee of the following block will be increased. Similarly, if a block is less than 100% full, the Base Fee will be decreased in the next block. So, the cost of having a transaction included in a block will still vary over time, but it will do so in a completely predictable way, with the Base Fee unable to change by more than 12.5% from block to block. Therefore, it should be much easier to work out how much should be paid to guarantee a transaction is included in one of the next few blocks.
Where this gets exciting for many is that the Base Fee, whatever value it’s at, is completely burned (destroyed) with every transaction. We’ll get into why this has to happen later but, for now, you just need to know that most of the ETH fuelling transactions will be removed from circulation instead of transferred to miners as it is today. Potentially, if the demand to transact is high enough to counteract its perpetual issuance, this could make ether a deflationary asset.
Of course, miners aren’t particularly happy with this because it will decrease their income. They will still receive a small portion of transaction fees as users will be expected to add a Tip on top of the Base Fee to give miners some incentive to include the transaction, but in most cases this will be a negligible amount, probably around 1 Gwei (or 1 one-billionth of an ETH) per transaction — though certain transactions will likely pay much more than this. That means miners will take a bit of a hit with 1559, and some (particularly the miners themselves), would argue this reduces Ethereum’s security as the incentives it offers to miners is essentially the network’s defence budget. This is the source of controversy around this update, and we’ll dig into it more later on to see if this reduction in miner income is as bad as it may seem.
Before we get to that, and before we really get into the details of 1559 to answer the questions you likely have about it, let’s take a step back and talk a bit about why we even have transaction fees in the first place. After all, wouldn’t the optimum user experience involve removing them completely?
Why Transaction Fees?
Transaction fees are something of a necessary evil in open and permissionless blockchains. By design, miners must receive, run, and validate every single transaction before grouping them into blocks that are sent out and stored forever by every computer participating in the network. That means there’s a real, permanent cost to every transaction that is felt by every participant in the system. Transaction fees act as a kind of tax to make users feel that same cost, dissuading them from making unnecessary (spam) transactions that waste other people’s resources.
Fees also help to prioritise transactions. Blocks are limited in size to minimise the social and computational costs as much as possible, but that limits the number of transactions that can be included in the block. If there are a large number of pending transactions, they can’t all be picked up. Therefore, a user with a particularly urgent transaction can pay a higher fee to encourage miners to include it quickly.
Generally, transaction fees ensure that the limited resource that is blockspace is allocated to those who need it most and receive the greatest benefit from it, as those people will be happy to pay the highest fee.
Finally, in systems like Ethereum where miners will be forever rewarded with freshly minted coins, transaction fees give miners a reason to include transactions in their blocks. That might sound strange, but there’s nothing to stop miners from creating empty blocks that contain only a single transaction paying the block subsidy to themselves, and that does happen from time to time. In fact, it can even be advantageous for miners to do this.
Every transaction included in a block makes the block a little bit bigger, which means it takes all the other miners a little bit longer to receive and process it before they can start building on top. Most of the time, those tiny delays are insignificant, but occasionally two miners will discover new blocks in almost the exact same moment. Only one of those blocks will eventually become part of the canonical blockchain, and that will be whichever one has a new block built on top of it first. In those circumstances, a larger block is slightly more likely to lose the race and be discarded or ‘uncled’, which means the creator of that block will lose out on most of the block reward and all the transaction fees in it (they don’t lose the full block reward as Ethereum does compensate uncles). Transaction fees should compensate miners for the increased risk of their block being uncled, with even a tiny fee of just a few Gwei proving sufficient for this.
Transaction Fees In Ethereum Today
Transactions in Ethereum are far more complicated than transactions in Bitcoin, and their computational cost can vary greatly. Some transactions are easy to compute — like transferring ETH from one account to another — while others are ridiculously complicated and may involve interacting with multiple DApps with cascading effects that must all be calculated.
To fairly price transactions according to their computational cost, Ethereum prices every basic operation in a pseudo-currency called ‘gas’. Simple operations like addition costs 3 gas, for example, while more complicated operations like querying an account’s balance costs 400 gas. Note that these operational gas fees are all fixed for every user and every block: every addition operation costs 3 gas, and every balance query costs 400. When a user makes a transaction, the cost of all the small operations involved in it are added up to give the total gas cost of the transaction.
But, that still doesn’t give the transaction fee that the user must pay. To get that, we need to convert the total gas cost into some amount of ETH.
Gas does not have a fixed ETH price. Instead, the price constantly changes as the market tries to find the correct rate for that moment in time. If there are a large number of transactions, then the gas price will increase as users try to outbid each other so miners will prioritise their transaction. And, if few people are making transactions, then the gas price will decrease because there’s no need to compete for blockspace.
However much a user pays for their gas, that number is multiplied by the total gas cost of the transaction to give the total fee in ETH. So, a simple transfer of ETH requiring 21,000 gas, with a gas price of 100 Gwei per unit gas, would cost 0.0021 ETH, or just under $4 at current prices.
It’s worth noting, though, that no matter how high you set the gas price, it’s the miners that have final say on which transaction are included in their blocks. It’s reasonable to assume that a rational miner would want to stuff their block with as many high-paying transactions as possible, but there’s nothing to make them do that. If you look through enough transactions in enough blocks, you’ll find some that appear to pay substantially less for gas than the market rate at the time — some (like this one) even have a gas price of 0.
The freedom miners have when selecting transactions means they can come to all sorts of arrangements with users when it comes to paying transaction fees. For example, they might accept payment in a token like USDC, or they might even arrange off-chain payments if that was beneficial to them. These kinds of unconventional arrangements are relatively rare today, but the fact that they can happen means ether’s status as the default money in Ethereum is at risk.
A wholesale displacement of ETH as the network’s primary money would be extremely damaging to its value, but it’s fairly unlikely to happen. So, while this is a concern that’s worth addressing if possible, it isn’t close to being the biggest drawback of the current transaction fee system. That would be what we’ll talk about in the next section.
Why EIP-1559?
The fee model used in Ethereum today can be described as a ‘First-Price Auction’. In these, bidders submit sealed bids, and the highest bidder wins and pays whatever they submitted — even if they later realise they bid many multiples higher than anyone else.
That’s one of the big problems with first-price auctions: they’re really difficult to reason about and so they often lead to under- or over-paying. A user who needs to make an urgent transaction has to think carefully about what others might be willing to pay and outbid them (or at least be close enough to those other bids that their transaction makes it into the next block). The user wouldn’t want to dramatically overpay, but in some cases it would be much worse to underpay and not be included in a block, and that results in some users bidding far above the necessary gas price. In the post where he initially discussed EIP-1559, Eric Conner showed that some users appeared to pay as much as 5 times what they needed to because of this. Those would be extreme cases, with the majority of users overpaying by much smaller amounts, but it goes to show how difficult fee estimation is under the current system.
To be clear, this isn’t just a human problem; the fee estimation tools that you can find online or that are built into wallets suffer from the same issues. They’re not good at dealing with volatile gas prices, often leading to stuck transactions that can confuse newcomers, and they’re particularly bad at recognising when a short, sharp burst of demand has subsided and gas prices can be reduced, leading to extended periods with unnecessarily high fees.
On top of all of that, fee estimators are gameable. Miners can use various methods to trick the estimators into increasing the recommended gas price, and while it’s something that probably doesn’t happen very often, it’s another thing that’s worth fixing if possible.
Predominantly, though, EIP-1559 exists as a solution to the poor user experience associated with First-Price Auctions. It wants to put an end to the unpredictable, unnecessarily high gas prices and stuck transactions we currently see. Gas prices shouldn’t be something the average user has to consider, they should be hidden away in the background, protecting the network without interfering in its usage. EIP-1559 aims to make that the reality on Ethereum. In the next section, we’ll see how it will achieve that.
How EIP-1559 Works
1559 begins with the concept of the Base Fee, a number that explicitly states the gas price a transaction must pay to be included in a block. By making this price clear to everyone, the mental cost and difficulties associated with first-price auctions are eliminated and users simply need to choose whether or not to pay the stated price.
The Base Fee cannot be constant throughout time — that wouldn’t allow blockspace to be efficiently allocated as the demand to transact changes. Ideally, the Base Fee should move up and down based on demand, always trying to find some optimum value for that point in time. But, what exactly does that optimum value look like?
We know that at any given gas price, there will be some number of users that are willing to transact because, at that price, the benefits of making the transaction outweigh the costs. At very low gas prices, like 1 Gwei, there will be a huge number of users willing to transact because the cost is so low that almost any benefit outweighs it. Meanwhile, at very high gas prices, like 1000 Gwei, very few users will benefit enough to make a transaction worthwhile. If we want Ethereum to always operate at its fullest potential, then the optimum gas price at any point in time will be the price that leaves exactly one block’s worth of these ‘worthwhile’ transactions — as in, the price at which demand equals supply, or the ‘market-clearing price’ if you’re into economics.
But now there’s another problem. The only way Ethereum can reliably determine the demand to transact is by looking at how full blocks are. If a block is less than 100% full at any given Base Fee, then the Base Fee should be reduced as it’s clearly above the market-clearing price. But what if the block is 100% full? That could mean the Base Fee is set perfectly and demand equals supply exactly… but it could also mean that the Base Fee is too low and there are thousands of transactions that weren’t included. Ethereum as a system doesn’t know about pending transactions, it only knows about what’s in blocks, and therefore it has no way of knowing which of those scenarios is correct. The solution comes in the form of another major change to Ethereum: a variable block size.
Ethereum limits blocks by how much gas they consume rather than an actual size in bytes. So, just as you add the gas cost of every operation in a transaction to see how much gas it requires, you combine the gas cost of every transaction in a block to determine how much gas the block consumes.
Today, a single block can consume up to 12.5 million gas. After 1559, that will continue to be the target — on average, blocks should still consume 12.5M gas — but, blocks as large as twice that size will be allowed. And that’s a general rule: whatever the target block size is set to, the absolute maximum will be double that.
With the ability to push blocks beyond that 12.5M target, it becomes easy to work out if the Base Fee is too low or just right. If a block is larger than 12.5M gas — or is more than 100% full — then Ethereum knows the Base Fee should be increased.
The amount the Base Fee changes up or down in a new block depends on exactly how overfilled or how empty the last block was. Ethereum will use this formula to determine the Base Fee of a block:
If you plug some numbers into it, you can see that the Base Fee cannot increase or decrease by more than 12.5% from block to block. Blocks that aren’t completely full or completely empty will have a proportionally smaller effect on the Base Fee. And, of course, blocks that are exactly 100% full will have no impact on the Base Fee, as supply and demand have been perfectly balanced at that price.
It wouldn’t be surprising to see that formula altered slightly in future updates as Ethereans gain a better understanding of how 1559 works in the real world and try to refine it. Until that happens, this version should ensure the Base Fee is responsive enough to adapt to genuine changes in demand without overreacting to very small or short-lived fluctuations.
So, we now have the Base Fee — an explicit gas price that all users must pay for inclusion in a block. And, we have a mechanism that will adjust that fee up and down in search of the magical market-clearing price, helping Ethereum allocate its blockspace as efficiently as possible at all times. But, how can we ensure every transaction actually pays the Base Fee?
Sure, the protocol could just make any transaction paying less than the Base Fee invalid, but that wouldn’t stop users and miners coming to some off-chain arrangements to partially or fully reimburse the fees paid for any on-chain transaction that is valid. For example, a user might want to make a transaction but not want to pay the full Base Fee. They could make a private agreement with a miner to have their Base Fee-paying transaction included in a block, but have the miner send some portion of that fee back to them on a Layer 2.
As long as miners receive all the ETH paid as the Base Fee, they can give some or all of it back to users and undermine the system — so we can’t let them have the ETH. For this reason, and a few other side benefits that we’ll discuss later, the entire Base Fee will be burned with every transaction.
But, we’ve already seen that miners must be given some reason to include a transaction or they simply won’t bother, so burning the entire transaction fee could incentivise miners to constantly create empty blocks. The solution to this is to add a ‘Tip’ that will go directly to miners. That means the total transaction fee paid by users will predominantly consist of the Base Fee — which will be burned — with a few Gwei added on top as the Tip.
Tipping also gives users a way of demanding special treatment from miners. If their transaction needs specific placement in a block, they can tip extra for that privilege. Or, if a sudden spike in demand means there are too many transactions for even a double-full block to handle, then the tip will help miners prioritise transactions as the system devolves back to a First-Price Auction.
At this point, though, you might be thinking that this all sounds like a bit much to deal with from a user perspective — hardly the UX improvement or simplification it’s supposed to be. So, now that we know what’s going on on-chain, let’s see what a future Ethereum user will actually have to think about when making a transaction.
EIP-1559 For Users
The good news is, most Ethereum users will never be aware of or have to think about any of this, not unless they actively want to get into the weeds of it.
In the most basic wallets, you’ll enter the details of the transaction you want to make (as you do today) and the wallet will tell you what that transaction will cost. If the price is acceptable to you, you’ll click go and the transaction will, in the vast majority of cases (like, 99% of the time), be included in the very next block. No hassle, no waiting, just the simple, slick experience it should be.
Users that want to fiddle with their transaction’s parameters will see (and essentially replicate) what those simple wallets are doing in the background. They will set two parameters for their transaction: the first is the tip that goes to miners, which will almost always be about 1 Gwei unless you’re making a special transaction, and the second is something called the Feecap.
The Feecap defines the maximum amount you are willing to pay for the transaction, including the tip, and it has been introduced to account for potential increases in the Base Fee. Most of the time, it would be safe to set the Feecap to equal the Base Fee plus the tip. However, most users and wallets will likely set the Feecap to some higher value, just in case a surge in demand pushes the Base Fee up before the transaction is included.
Whatever the Feecap is set to, every transaction will pay the minimum possible fee every time. This is one of the great, underrated features of 1559. It means you can set the Feecap to allow for any number of double-full blocks without ever worrying about overpaying. You know you will always pay the Base Fee of the block you were included in plus the tip and not a Gwei more. So, if a user ever accidentally changes their wallet’s Feecap settings, they won’t be penalised for it. And, as a nice bonus, the Feecap will also allow you to schedule transactions by setting it below the current Base Fee.
Finally, you might be wondering what would happen if you used a wallet that hadn’t been updated to work with 1559. After all, a non-upgraded wallet wouldn’t know about the Base Fee or how to set the Feecap and tip, it would continue trying to guess an appropriate gas price as it does today.
Fortunately, this scenario has been considered by the developers behind 1559. If you were to make one of these ‘legacy transactions’ using a non-upgraded wallet, Ethereum would convert it into a 1559-style transaction, setting both the Feecap and tip to equal the transaction’s gas price. That means miners would be able to claim the difference between the gas price and the Base Fee, so you wouldn’t be guaranteed to pay the minimum fee possible as you would with a proper 1559-style transaction. But, it at least means all users can carry on as they are today, even if they’re using a really old wallet that has been abandoned by its developers.
In reality, that scenario would be applicable for a very small number of users, as all the major wallets and DApps will be ready to support 1559 on its arrival, so it’s not something to worry about.
In fact, if I haven’t made it clear already, none of this is worth worrying about. If anything here sounds confusing or intimidating, you absolutely will not need to think about it when 1559 is live. Most wallets will automatically set the Feecap and tip for you, just as they can set the transaction fee for you now. The only difference is, they will do a far better job of it than they can today. That’s what EIP-1559 is all about.
By making the cost of inclusion in a block extremely clear and easy to estimate over short timeframes; by constantly adjusting that cost to balance demand with supply; and by introducing flexibility into the size of blocks, 1559 will dramatically improve the experience of transacting on Ethereum and will effectively eliminate the time spent waiting for a transaction to confirm. And, as has been mentioned several times already, 1559 will also come with some additional side-benefits. In the next section, we’ll take a look at them.
Additional Benefits
1159 has three beneficial side effects that all stem from the burning of the Base Fee: it will cement ETH’s position as the money on Ethereum by preventing fees being paid in other currencies; it will (potentially) make ether a deflationary money; and, in doing so, it will improve Ethereum’s security by making the perpetual block subsidy more acceptable and by reducing the variability of the security budget.
We touched on the first of these benefits earlier. Because Ethereum will burn the entire Base Fee of every transaction, and because transactions that don’t pay the Base Fee will be invalid, miners will lose much of their freedom to make alternative arrangements for transaction fees. Sure, they could still choose to accept USDC or something else as payment, but then they would have to provide the ETH to be burned, so their arrangement is irrelevant from Ethereum’s perspective. Essentially, 1559 will eliminate the risk of ether being displaced and losing its monetary premium.
The second benefit is the one that receives all the attention. If the Base Fee is high enough that the total amount of ETH burned in each block is greater than the block subsidy, then ether will become a deflationary asset. This isn’t guaranteed, of course, as we don’t know how things will evolve in the future, but everything that’s taken place over the last year or so suggests it’s reasonable to expect more ETH to be destroyed than created once 1559 is in place. How much more is difficult to say, and in all likelihood it won’t be nearly as significant as some are suggesting, so I think this is a situation where the meme and the idea are much more powerful and important than the reality.
The introduction of EIP-1559 and the fee burn could be a landmark moment for ether as an asset. For years, Ethereans have argued that ‘ETH is money’ in the same vein as Bitcoin, and yet ether is still widely viewed as a ‘digital oil’ instead. There are likely many reasons for this, but I suspect a significant one is that it lacked a clear, credible monetary policy when compared to Bitcoin. With 1559, there will still be a degree of complication and complexity, but the general idea is much simpler and there will be something very real to point to when explaining why ETH is an attractive store of value and potential money.
At the very least, even if 1559 doesn’t help ether receive widespread recognition as a money, the deflationary pressure of the fee burn should create a much stronger relationship between the success of Ethereum the platform and ether the asset. It means ether is much more attractive to hold for anyone who believes in the potential of Ethereum, while previously it might have made more sense to express that bullishness using investments in the app-layer.
Overall, then, this is a pretty positive update for ether as an asset, and it’s no surprise that people are excited about it.
Perhaps more important, though, is EIP-1559’s impact on Ethereum’s security. The update will bring a few security benefits and help Ethereum achieve its goal of ‘Minimum Viable Issuance’. This is a core principle of Ethereum’s social contract, and it’s all about minimising the security spend without meaningfully impacting security — something that has traditionally been difficult to achieve but is made much easier with 1559.
All open blockchains must incentivise the miners or validators that maintain and protect the network, and they generally do this using a combination of newly minted coins and transaction fees. But, there’s a problem: if the network constantly prints new money to incentivise miners, the money becomes less attractive as holders will lose value through inflation. Because of this, many blockchains are designed to gradually reduce the block subsidy over time and eventually become 100% dependent on transaction fees. But, this also has problems: transaction fees are unpredictable, potentially leading to varying levels of security that may be inadequate at times. Worse still, highly volatile fees could even generate instability, as miners could start reorganising the blockchain to redirect the fees in high-paying blocks towards themselves. Traditionally, then, networks have to choose: do they prioritise their money and keep inflation low, or security and issue new money forever?
Ethereans believe security is the highest priority, and so Ethereum has a perpetual block subsidy. But, they recognise the downsides of this and are committed to reducing the negative impact on ether as much as possible, hence the idea of Minimum Viable Issuance. Until 1559, that just meant keeping the block subsidy as low as possible without endangering the network, but now they can go further: ETH’s supply can be reduced (or, at worst, increased at an even slower rate) without compromising security. In short, 1559 allows Ethereans to have their cake and eat it.
Even better, EIP-1559 makes the security budget, and therefore the level of protection on offer, more predictable. With the majority of transaction fees burned and virtually all miner incentives coming from the block subsidy, everyone can say with greater certainty how much miners will earn in the months to come. There’s no need to worry about demand reducing and fees drying up as this will have no impact on security. Everything comes down to the block subsidy, which can be adjusted up and down as needed with relative ease — and, in the event that an increase was necessary, 1559 should reduce the opposition to the move as everyone knows the fee burn is already counteracting it. Finally, because income from transaction fees will be much less than income from the block subsidy, miners are less likely to reorganise the chain as there will simply be fewer opportunities where that would be worthwhile.
With all these benefits on top of the improved usability, EIP-1559 is clearly a positive development for Ethereum. But, like everything in life, it can’t all be good. In a moment, we’ll take a look at the potential problems and risks that 1559 introduces and how it mitigates them.
Before that, though, I want to quickly talk about one thing that EIP-1559 will not do.
What EIP-1559 Will Not Do
Before we move on, I want to make it really clear that EIP-1559 will not meaningfully reduce gas prices and transaction fees in Ethereum. This is a misconception that you’ll often see repeated online, but it’s simply not true: only true scaling solutions can help with this.
Yes, 1559 may have a small impact on transaction fees by ensuring you don’t overpay, but you’ll still have to pay the market rate for gas which will continue to be driven by the same levels of supply and demand that we see today. Fortunately, there are many scaling solutions in various stages of development and deployment, so the days of most transactions being prohibitively expensive should soon come to an end. When they do, though, 1559 will have had nothing to do with it.
Risks Of 1559
One concern you might have about the Base Fee is that it can be manipulated up or down to suit some attacker’s needs — that’s probably the primary concern with 1559. So, how might this kind of attack play out and how is the threat minimised?
By its very design, 1559 makes manipulating the Base Fee upwards extremely expensive and, while anyone could do it, it’s not obvious why anyone would do it as there just aren’t any reasons to that would justify the cost.
The attack itself is pretty simple: the attacker just need to send enough transactions to continuously double fill blocks, and Ethereum will respond by increasing the Base Fee by 12.5% each time. Of course, the increasing Base Fee makes the attack continuously more expensive, 10x-ing the cost of the attack after just 5 minutes and 100x-ing it after 10 minutes. Realistically, no attacker would last long and, while there would be a string of mostly empty blocks for a few minutes after the attack ends, the Base Fee would return to its proper level almost as quickly as it was pushed away from it. At worst, Ethereum might become prohibitively expensive for most users for 20 minutes or so, but anyone who desperately needed to make a transaction would probably make it into a block by paying a generous tip on top of the high Base Fee, so it wouldn’t even be totally unusable.
Manipulating the Base Fee downwards is a little harder to do. Only miners would be capable of reducing the Base Fee below its proper value, and even then they’d need to be organised in a 51% attack. But, they might have a good reason to do it. If they ignored most pending transactions and only ever produced part-full blocks, then they could pull the Base Fee towards 0 and eventually recreate today’s First-Price Auction system. Miners would select a small number of the highest tipping transactions, no ETH would be burned, and users would be back to guessing how much they needed to pay to be included in a block.
While this may sound concerning, it’s not as much of a problem as it first appears. For starters, miners could engage in 51% attacks today and, depending on how exactly they carried it out, it could be quite profitable. More profitable, in fact, than a Base Fee manipulation attack would ever be. But, for a variety of reasons, we don’t see 51% attacks today, so there’s no reason to think they will suddenly be more likely once 1559 is in place. If anything, a 51% attack to reduce the Base Fee is less likely because it actually encourages miners to defect from the attacking group. This is because the group’s aim is to keep blocks below target, but the most profitable action for each individual miner is to double-fill their block with high-tipping transactions. If we assume it’s too difficult for miners to coordinate for a profitable 51% attack today, it’s almost certainly too difficult for them to do it in a world where every member is paid to defect.
So, we can be reasonably comfortable in saying that the Base Fee is unlikely to be manipulated with 1559 in place. But, there’s one other area that might have you concerned: the increased block size. How could double full blocks impact Ethereum? Could they make it any less safe?
Earlier, we saw that Ethereum’s blocks are limited in size to reduce the social and computational cost of participating in the network. If the size limit is doubled, then it’s reasonable to think that the social costs would also double: you’d need more computing power to process blocks, for example, and the overall size of the blockchain would grow faster as well. But, it’s important to note that EIP-1559 won’t bring a persistent increase in block size, it will only allow occasional double full blocks to be created when demand increases enough to justify that. That means the actual impact on node operators should be fairly low and almost unnoticeable. In fact, nodes are already dealing with effectively the same challenge today, as the random nature of Proof of Work means there will occasionally be a flurry of blocks, resulting in effectively doubled block capacity for about five minutes every week. Extra-large blocks under EIP-1559 aren’t too dissimilar to that, so if the network functions well today, it’s unlikely to struggle once 1559 is released.
Overall, then, there’s no reason to be overly concerned about 1559 and its impact on Ethereum’s security. It’s not introducing any new attack vectors and even makes some existing ones a little more difficult or expensive.
As Tim Roughgarden summarises in his paper analysing the update: “Most of the major risks in implementing EIP-1559 are the same as those for any major change to the Ethereum protocol: implementation errors; a fork caused by some parties rejecting the changes; extra complexity at the consensus layer; additional parameters to be tweaked with every network upgrade; and the spectre of unforeseeable downstream consequences.” A list of reasons to be generally cautious when making changes to Ethereum, but nothing specific to 1559. He does go on, though, to mention “additional risks specific to EIP-1559”, where he highlights one concern that has garnered a lot of attention in recent weeks: “the possibility of a hostile reception by miners”. We’ll talk about that in the next section.
EIP-1559 & Miners
For most Ethereans, EIP-1559 is a potentially exciting but relatively unseen update, something that will work away in the background to make life a bit easier or a bit better without making its presence known. But that isn’t the case for miners, who will immediately feel the impact of the update as it burns a portion of transaction fees and eats into their profits. Because of this, it’s no surprise that Ethereum miners have started to voice their concerns and objections to 1559 in recent weeks. But, how worried should miners be about the update? And how worried should users be about miners?
Until 1559 is out on Ethereum, we won’t know what portion of fees will be burned and what portion will go to miners, and so we won’t know exactly how miners will be affected by the change. In all likelihood, it won’t be as bad as it first seems.
For a long time, and perhaps even still, the majority of people assumed that virtually all fees would be burned under 1559, reducing miner revenue by as much as 50%. That doesn’t seem realistic, though. While the majority of transactions will probably pay the minimum tip and have the majority of their fee burned, a small number of transactions will likely tip significant sums in search of special treatment from miners.
These transactions exist because the ever-growing financial system on top of Ethereum creates a vast number of ‘free money’ opportunities that are only available to the first person on the scene. For example, only one person can actually step in to liquidate a loan that has become undercollateralised, and so anyone looking to do that would tip handsomely to ensure they are the one unlocking that value. In many cases, the users behind these transactions don’t care how much they pay as long as they can eke out the slimmest of profits. That means they will always overpay and ensure miners don’t lose anything like 50% of their income. In fact, according to researchers Hasu and Georgios Konstantopoulos, these transactions mean the worst-case scenario for miners would be a 35% reduction in income after 1559. While that would still be a sizeable hit, that is the worst case that assumes researchers are better than they probably are at identifying these transactions, and that ignores the fact that the number of these transactions will only increase in the future. It’s also worth noting that miners can do so much more to maximise their income from these opportunities.
Because miners have final say on which transactions are included in blocks and how they’re arranged, they have the ability to prioritise their own transactions to extract the full value of these ‘free money’ opportunities themselves. For this reason, these opportunities are considered ‘Miner Extractable Value’ or ‘MEV,’ and they could provide miners with an additional revenue stream that offsets the fee-burn and makes them even more profitable than today. So, while 1559 may cause a bit of pain for miners in the short term, it won’t be anywhere near as bad as some have suggested and can probably be offset in the longer term if miners fully embrace MEV.
So, we can say that miners really don’t need to be concerned about the impact of 1559 — after all, they’ve probably taken bigger hits from ether’s volatility than they will from this update. But, some miners are still quite angry about the change and are pushing hard against it, and that has made some users concerned about a chain split or a 51% attack once 1559 is activated. How real are those concerns?
First of all, because it will have a bit of a negative impact on them, it makes a lot of sense for miners to be as loud as possible about this update before it’s in place, just to see if they can have it altered or even get something out of it. So, it doesn’t necessarily mean anything to hear miners complaining.
However, things have gone a bit beyond what you might expect from that kind of posturing, perhaps aggravated by the fact that Ethereans tend to be even more anti-miner than the communities around other Proof of Work assets. If miners don’t feel listened to or respected by the Ethereum community and developers, then it’s not surprising that they may resort to something like the ‘show of force’ that was briefly considered. It must be especially frustrating for miners that are legitimately committed to Ethereum, that work tirelessly to support the network, and that do have genuine concerns about the reduced security budget with 1559. At the end of the day, though, no matter how angry they get, the risk of a miner backlash is minimal.
Miners are still rational people running businesses in a highly competitive environment, so they will almost always act to maximise their profits. In this case, it will be much more profitable to continue supporting Ethereum or transfer hashpower to a different, existing blockchain than it would be to attack Ethereum or try forking it into something new.
Overall, then, it’s clear that these fears are unwarranted. EIP-1559 will likely be no worse for miners than some day-to-day price swings have been, and miners are unlikely to threaten Ethereum or cause problems for users.
Conclusion
That’s just about everything you need to know about EIP-1559.
We’ve seen that it’s a change to Ethereum’s transaction fee mechanism that will make the cost of inclusion in a block clear and obvious to everyone, meaning you and your wallet will know exactly how much to pay every time. We’ve seen that, to make this system work, a portion of the fee must be burned with every transaction, which could also bring tremendous benefits to ETH as an asset and Ethereum as a network. And, we’ve seen that despite a portion of transaction fees being burned, miners won’t lose too much income because there will always be a number of very high-paying transactions competing to extract ‘free money’ from Ethereum’s financial system.
Overall, EIP-1559 is a sizeable change to Ethereum, but it’s well worth making. The potential risks of implementing it are massively outweighed by the many benefits, and as both a user of Ethereum and an ETH holder, I’m very much looking forward to 1559’s introduction in July’s hard fork.
Extra Reading / Resources
There is a ton of content out there discussing and analysing EIP-1559 from every angle, and I read, watched, and listened to a fair few pieces as I was researching and writing this.
If you’re looking to continue your exploration of EIP-1559, you could do a lot worse than checking out some of these pieces that stood out to me:
📖 Read:
- Why 1559? by Tim Beiko
- Blockchain fees are broken. Here are 3 proposals to fix them. by Haseeb Qureshi
- All You Need to Know About EIP-1559 (and more) by Uncommon Core
- The Price of Agency by Barnabé Monnot
- Transaction Fee Mechanism Design for the Ethereum Blockchain: An Economic Analysis of EIP-1559∗ by Tim Roughgarden
- Economic Analysis of EIP-1559: A Summary by Saša Milić (summarises Tim Roughgarden’s lengthy paper).
🎧 Listen:
📺 Watch:
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Disclaimer: Anything expressed here is my own opinion stated for informational and educational purposes; nothing I say should be taken as investment or financial advice. Many projects mentioned on this channel are highly experimental and therefore come with risks. Please evaluate your own risk tolerance before experimenting with these projects.
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