EIP-1559: Make gas prices more transparent instead of lowering them

EIP-1559: Make gas prices more transparent instead of lowering them

EIP-1559 was launched on August 5, 2021. As part of the London hard fork, there was no hypothetical fear; the chain split due to the fact that miners did not fork Ethereum and used EIP-1559 as part of the fork , The price plummeted ( ETH actually increased by 4%). EIP-1559 changes the way the Ethereum network fee market works; it introduces a new basic fee, the destruction fee, instead of being paid to miners, users can now specify the highest fee and priority fee for transactions instead of gas prices .

Under EIP-1559, the calculation formula for transaction fees is as follows:

Transaction fee = baseFee + min(maxFee-baseFee, priorityFee)

  • baseFee: According to the network congestion and the latest value (for the block space) floating fee, it can be obtained through the new JSON RPC call eth_feeHistory
  • priorityFee (also known as tip, miner tip): the fee used to attract block producers to participate in the transaction
  • maxFee: The highest network fee the user is willing to pay.

EIP-1559 did not appear out of thin air. It was designed and implemented to solve some major problems in the Ethereum network. But before that, let us go back to the beginning: What is EIP-1559?

EIP-1559 ( Ethereum Improvement Proposals 1559), proposed by Vitalik Buterin in 2019 , describes the changes in the Ethereum fee model. It is defined as a transaction pricing mechanism that includes a fixed network fee per block, which is destroyed and dynamically expanded/contract block size to handle short-term congestion.

In order to fully understand the above content, we must first look at what Ethereum’s fee model was before EIP-1559; a simple auction mechanism, also known as first price auction. In this first-price auction model, users who want miners to resolve their transactions must bid to include their transactions in the block. This is achieved by submitting the gas price they are willing to pay for a particular transaction. These miners are incentivized to classify transactions according to the highest gas price and include the most profitable transactions in the block first. Users with lower gas prices will have to wait a long time before they can include their transactions in the block. This usually results in users overpaying to include their transactions in a block. This is very inefficient and not ideal for user experience.

EIP-1559 came to the rescue with the following goals:

  • Make transaction fees more predictable: Before EIP-1559, Ethereum transaction fees were market-driven, that is, the gas price/fee determined the speed at which miners included transactions in the block. In the past, during ICOs, network upgrades or NFT booms, network activity was high, and it was difficult for network users and wallets to predict gas costs. This either leads to a payment that is too high and is included in the block, or it leads to a payment that is too low and waits a long time for the transaction to be included in the block, neither of which is ideal. EIP-1559 is sold at a fixed price instead of gas fees. Now, the person submitting the transaction no longer needs to guess how much gas is needed, because there will be a clear “base fee” to get included in the next block and tip to pay the miner. For users or applications that want to prioritize transactions, more tips can be added to encourage miners to prioritize transactions. The basic fee will be “burned”, meaning destroyed, and the tip will go to the miner. Wallets like MetaMask also use this to make better estimates, because baseFee is managed by the protocol itself, so there is no need to rely too much on external oracles.

If there is a surge in demand due to high network activity (such as a decline in NFT), the system will also return to the first price auction of tips, but because it is obvious when the peak ends and the price shrinks faster, this may be in the next Several blocks (may take a few minutes). The idea is to make fees based on block demand more transparent to users.

  • Reduce the delay of transaction confirmation: Pre-EIP-1559, the transaction delay is because the block is always full; the above are the transactions with the highest payment since the last block. If a transaction is included in the block, it must pay a higher gas fee. If it does not pay a higher gas fee and therefore will not be included in the block immediately, it is difficult to estimate when it will be included in the block. After EIP -1559, a block can be 200% full, that is, regardless of the gasLimit set by the block, a block with twice the gasLimit will be valid. For example, if the gas limit of the block is set to 10m gas, the block with the maximum 20m gas will be valid. This means that in most cases, blocks will have an additional 100% capacity and can still be filled with transactions. Therefore, as long as the transaction sending fee is higher than baseFee and includes a miner tip (priorityFee), it will be included in the next few blocks. The difference between maxFee and baseFee + tip will be returned to the transaction sender (unlike pre-EIP-1559).
  • Create a positive feedback loop between network activity and network supply: EIP-1559 allows to increase network capacity by changing the maxGas cap per block from 12.5 million gas to 25 million gas, which is twice the block size. With baseFee and increased network capacity, EIP-1559 can be the following logic. When the network utilization rate exceeds 50%, the basic cost increases, and when the network utilization rate falls below 50%, the basic cost decreases. This means that the goal of the network is to achieve a 50% capacity balance by adjusting costs accordingly based on network utilization.
  • Create deflationary pressure: Under EIP-1559, the base fee is part of each transaction. The basic cost rises and falls with the demand for block space. During the period of continuous high demand for block space, the basic cost has risen, putting deflationary pressure on the supply of ETH. Destroying baseFee creates an interesting feedback loop between network users and ETH supply. More network activity means more ETH is destroyed, and it also means that less ETH can be sold by miners in the market, which makes the existing ETH more valuable. The basic cost of destruction is basically a reward for network users, by making their ETH more scarce and more valuable, rather than paying excessive prices to miners.

Contrary to popular misconceptions about EIP-1559 reducing gas fees, what EIP-1559 really does is to make gas prices more transparent, rather than lower prices, optimize the fee model by smoothing peak fees, and limit the number of overpayment transactions. The main way to reduce gas costs is still ETH 2.0 and Layer 2 scaling solutions, I believe we can’t wait.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/eip-1559-make-gas-prices-more-transparent-instead-of-lowering-them/
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