EIP(Ethereum Improvement Proposal) 1559 is the buzzing London hard fork update that intends to give a better outlook on Ethereum’s monetary policy.
It has the potential to reduce the volatility in transaction fees and weed out redundant transactional charges caused by preceding auction-based systems.
Here’s what all you need to know about EIP 1559:
What is EIP 1559?
Table of Contents
- 1 What is EIP 1559?
- 2 Why is EIP 1559 so Important?
- 3 When Does EIP 1559 Start?
- 4 How will EIP 1559 Affect Gas Fees?
- 5 Why is EIP 1559 Deflationary?
- 6 How will EIP 1559 Affect Mining?
- 7 Technical Benefits of EIP 1559
- 8 Disadvantages of EIP 1559
- 9 Does EIP 1559 Increase ETH Price?
- 10 Why Does EIP 1559 Burn ETH?
August 2021, the Ethereum network saw the biggest transition since its inception in the form of the London hard fork update, eip1559. It alters the way users experience transactions on the Ethereum blockchain.
Its primary aim was to improve the transactional fee model from the earlier used Legacy model. It gets rid of the first-priced auction system as the main gas price calculating mechanism.
Ethereum Network defines it as a transactional mechanism comprising pre-determined base fees. It allows dynamic adjustments in block size to deal with the transient congestion on the network.
Ethereum EIP 1559 uses an integrated system of fixed base fees(that burn upon transaction) and the miner’s tip(an incentive to the miner), optimizing the transaction fees to be paid by the user.
Additional Resources: Ethereum Virtual Machine
Why is EIP 1559 so Important?
It enhances the user experience, addressing unpredictability in transactional processes faced by the users with the preceding model.
In the legacy model, if the user bid a very high gas, they have to pay that price even if the demand is low. While EIP 1559, if the specified fee cap is higher than the base price, the user is liable to get a refund of the difference.
Alongside this, it manipulates how the fee market functions on the Ethereum mainnet. It establishes a new base fee that is burned rather than paid out to miners controlling the inflationary tendency of Ether.
Also, gas price changes are predictable with EIP 1559 as it often changes with the base fees that can alter only at a maximum rate of ?12.5% every succeeding block.
When Does EIP 1559 Start?
Ethereum’s founder, Vitalik Buterin first proposed the idea of a transparent financial policy in 2019. This was done in response to the existing transactional discrepancies in the Ethereum network.
Bringing transition in the same, introducing the EIP 1559 countdown ended on the Ethereum mainnet on August 5, 2021.
There are many side chains of Ethereum, and EIP 1559 activation was accepted by some of them. For instance, In January 2022, succeeding in a successful upgrade on the Mumbai testnet, eip 1559 went live on the Polygon mainnet as well.
How will EIP 1559 Affect Gas Fees?
Probably, the most controversial aspect of EIP 1559 introduction.
There has been a misconception surrounding the same, that it will drastically reduce the gas price on the Ethereum network. Majorly, it introduces transparency in ETH price prediction after eip 1559.
It merely aids in soothing out the gas price by enabling blocksize to increase amid surges in demand. It does not make Ethereum transactions cheaper in the longer run. Ultimately, it is the transient congestion on the network and available block space that determines the fluctuations in gas price.
Why is EIP 1559 Deflationary?
Institutionalization of the base fee burning mechanism removes a certain amount of Ether from the overall supply chain forever. Through this, eip 1559 seeks to control the supply of Ether.
Base fee changes with the increase or decrease in the demand for block space, in a predictable manner. During the period of sustained high demand for block space, the base fee increases leading to more ETH burning.
Thus, the burning mechanism creates a virtuous feedback loop leading to deflationary pressure on the supply of Ether, escalating the returning value for ETH holders.
How will EIP 1559 Affect Mining?
EIP 1559 brought in the burning mechanism of Ether instead of transferring the complete gas price to the miners as applicable in the legacy system. This gave a head up to the miners who were against its introduction to the Ethereum network.
Although this might be true in the longer run, initially daily miner’s revenue increased by 7.1% and remained at two-month highs, as per data from Coin Metrics.
Technical Benefits of EIP 1559
The upgrade had been in the picture for almost 2 years before its introduction on the Ethereum mainnet. EIP 1559 along with simplifying Ethereum’s fee structure, sort to bring a new monetary policy to the Ethereum network.
Technical benefits associated with the inception of Ethereum Improvement Proposal 1559 are as follows.
- It seeks to bring transparency to Ethereum’s fee mechanism, as the base price becomes predictable incontinence with the block demand.
- Burning of the base fee upon transaction controls the deflationary pressure on the supply of Ether. This creates an optimized feedback system, controlling Ethereum circulation by eliminating coins from Ethereum’s total circulating supply.
- Fluctuating Block Sizes that can increase up to 2X its original size based on the transient network congestion.
Disadvantages of EIP 1559
Every coin has a flip side to it. Along with streamlining the monetary policy of Ethereum, eip 1559 has left some issues unaddressed.
Following are some of the disadvantages that came along with its commencement.
- As anticipated it does not make Ether cheaper. It only creates a transparent transaction mechanism for the Ethereum Network.
- It seeks to bring security to Ethereum, but that’s not always true. There are chances that changes in codes can bring potential dangers to the network.
Additional Resources: Mainnet VS Testnet
Does EIP 1559 Increase ETH Price?
Commencement of the base fee burning leads to Ether’s removal from the overall supply chain, creating deflationary pressure on its supply.
Thereupon, the burning of the base fees creates a virtuous feedback loop between the network users and the ETH supply. More network activity equals more ETH burn, which equals less ETH available to be sold on the market by the miners, making the already existing ETH more valuable.
Burning the base fee rewards the users of the network, by making their ETH more scarce and thereby valuable, instead of overpaying miners.
Why Does EIP 1559 Burn ETH?
The London hard fork update brought in the Ether burning mechanism in the form of the base fee burn upon the completion of the transactions on Ethereum.
This creates a sustainable feedback loop in the overall Ethereum supply chain. As the demand for block space increases, the base fee goes up by up to 12.5% with each succeeding block.
The more the base fee increases, the more Ether burns to create an ETH scarcity, leading to higher prices for the existing ones.
This helps in creating deflationary pressure on Ether supply, incentivizing the Ethereum network users.
It’s not every day that the crypto world mentions specific Ethereum Improvement Proposals EIPs. EIP-1559 smash this trend.
Ethereum Improvement Protocol 1559 has been live on the Ethereum mainnet for some time now. Contradictory to decreasing gas prices, it turned out to be the transparent monetary policy mechanism for the Ethereum network.
So, Stay tuned with ImmuneBytes, to be in the known with more such information about Ethereum, and other blockchain protocols.
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