The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

Ethereum is about to usher in an important upgrade with a milestone in its development history.

Text | Liang Yushan

Ethereum is about to usher in an important upgrade with a milestone in its development history.

On July 14 (official tentative), Ethereum will launch a “London” hard fork upgrade containing 5 proposals, of which EIP-1559 has attracted much attention. This proposal has aroused intense discussion in the Ethereum community. Supporters call it “the scarcity engine of ETH”, believing that it will power the price of ETH; opponents claim that it is a redistribution of wealth from miners to holders. It was a “robbing” of miners.EIP-1559: ETH 1.0’s fee market reformEIP-3198: BASEFEE opcodeEIP-3529: Reduce gas refundEIP-3541: Reject new contracts beginning with 0xEF byte (byte)EIP-3554: Difficulty bomb postponed to December 1, 2021

What is involved in EIP-1559? What is the purpose of implementing this proposal? How deep is the impact? Starting from the Ethereum Gas fee (if you already know gas, you can directly read the second part), this article will comprehensively introduce EIP-1559 that affects users, miners, and investors.

1. Gas

1. What is Gas?

According to the official definition, Gas is a unit that measures the amount of computational work required to perform specific operations on the Ethereum network.

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Picture from ethereum.org)

Simply understand that any operation (such as calculation, storage or token transfer, etc.) on the Ethereum network requires payment of Gas. The effect of Gas on Ethereum is the same as that of gasoline to cars. Without fuel supply, the system cannot operate.

In theory, the level of Gas is determined by the computing resources required for operation. The more complex the operations performed, the higher the gas cost. Generally, the cost of invoking a smart contract is higher than the transfer (regardless of the amount, the gas consumed by the transfer is fixed at 21,000).

2. How to calculate Gas fee?

Gas fee is paid in ETH, and its price unit is expressed in gwei, 1gwei = 0.000000001 ETH.

Gas cost = Gas price * Gas ​​units (limit).

Gas price refers to the price that users are willing to pay for each Gas.

Gas Limit is the maximum amount of gas that a user is willing to pay for performing an operation or confirming a transaction.

This is equivalent to the cost of using the Ethereum network = Gas price * How much gas is used.

For example, if Alice wants to transfer 1 ETH to Bob, the Gas limit is 21000, and the Gas price is 200 gwei, then the transfer fee is 21,000 * 200 = 4,200,000 gwei (0.0042 ETH).

In another case, if Alice sets the Gas limit to 50000 and the Ethereum virtual machine only consumes 21000, then the system will return the remaining part. But if the gas limit set by Alice is too low, the transaction will be cancelled due to insufficient gas, and the gas will be consumed due to the use of computing resources.

3. Why do I need to set up Gas?

Introducing a gas fee for each operation can keep the Ethereum network safe. By charging, you can prevent participants from sending spam to the network to a certain extent. At the same time, this prevents accidents in the code and the network from falling into an infinite loop.

4. What changes have happened to the gas fee?

At the peak of the bull market from 2017 to 2018, the average transaction fee of Ethereum was around US$5.7, but then due to the market turning bearish, the fee has been below US$1 in 2019.

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Data from bitinfocharts)

As of June 2020, due to the boom in liquidity mining, the activity on the Ethereum chain has surged. The average transaction fee rose above US$1 in August and rose to above US$10 in early September, the highest level of the year.

Entering 2021, NFT will take over DeFi, the utilization rate of Ethereum continues to rise, network congestion intensifies, and the average transaction fee once reached a high price of nearly $70 on May 12, a record high.

However, as the cryptocurrency market began to cool down in late May, the average transaction fee of Ethereum also dropped, and it is currently basically staying below $6.

5. What factors affect the gas fee?

The congestion of the Ethereum network and the increase in the price of ETH will cause the gas fee to rise.

On the one hand, as dapp functions become more and more complex, the number of operations performed by smart contracts continues to increase, and each transaction occupies more space in a limited-size block. Because of excessive demand, the network has become congested, and users must pay higher transaction fees to incentivize miners to prioritize packaging transactions into blocks (this is similar to going to the same location, taking a taxi is faster than taking a bus, but the cost is higher) .

On the other hand, the rise in the price of ETH will also push up transaction fees, but this is also due to the increase in the use of the Ethereum network (gas rise) and the market’s expected increase in the future of ETH.

What impact will the gas fee increase have? From the perspective of Ethereum miners, income has increased and the income structure has changed. According to the mechanism settings, the income of Ethereum miners comes from block rewards (fixed at 2 ETH) + handling fees, and usually the benefits of block rewards are higher than handling fees. However, starting from August 2020, due to the upsurge of DeFi and NFT, activities on the Ethereum chain have increased sharply, gas fees have risen sharply, and the proportion of handling fees in the total income of miners has gradually increased.

Data show that in January this year, Ethereum miners earned 800 million U.S. dollars, of which nearly 40% were transaction fees. By May, the income of Ethereum miners reached a record high, reaching $1.94 billion, of which nearly 50% was transaction fees.

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Data from The Block)

Two, EIP-1559

1. What is EIP-1559?

EIP-1559 was originally proposed by Ethereum founder Vitalik Buterin in 2018. It is a solution to the pricing mechanism of Ethereum network transactions.

There is a view that EIP-1559 will solve the problem of Ethereum’s high transaction fees, but this is not the case.

In essence, EIP-1559 only changes the original auction mechanism (higher bidders have priority in obtaining block packaging rights) to make transaction fees predictable and more transparent, but this will not change the high gas fee. After all, network congestion is caused by the lack of scalability, and EIP-1559 will not change the structure of the Ethereum blockchain.

2. What is included in EIP-1559?

EIP-1559 involves three parts:

1) Adjust the block gas upper limit;

2) The basic fee (BASEFEE) is added, and all transactions packaged in the same block use BASEFEE as the Gas Price, and this part of the fee will be destroyed by the agreement and cannot be obtained by the miners;

3) Add tip (Tip), miners can get this part of the fee, but the amount of the fee is determined by the user.

•Basic Cost & Adjust Gas Cap

In the design of EIP-1559, the basic fee is the minimum gas price required for users to send transactions or complete operations on Ethereum. According to the proposal, the minimum value of the basic fee may be 7 wei, which is equivalent to 0.000000007 gwei.

However, when the Ethereum network is congested, the basic fee that users need to pay will fluctuate according to the changes in the space used by each block.

EIP-1559 proposes that the algorithm adjusts the basic cost according to the filling degree of the previous block. If the previous block is larger than the target block size (that is, the network usage rate>50%), the basic fee increases. vice versa. That is, when the network usage rate is greater than 50%, the basic fee will increase; when the network usage rate is less than 50%, the basic fee will decrease.

Ideally, the maximum gas limit for each block on Ethereum is 15 million Gas. However, when the network is congested, EIP-1559 will allow the block size to double.

Under the EIP-1559 design, once the block size exceeds 15 million Gas, the basic fee for users to execute transactions will increase by 1.125 times (12.5%). Correspondingly, if it is below the threshold, the basic cost is reduced by 12.5%.

Coindesk Research pointed out that given that the mining time for each new block is 13 seconds, if large blocks (higher than 15 million Gas) continue to appear in the network, the basic fee may increase in about 5 minutes or 20 blocks. 10 times.

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Picture from Consensys)

It is worth noting that in the EIP-1559 design, the basic cost is not distributed to miners, but directly destroyed. This is the key to the hot discussion among Ethereum miners.

• Add tip

Before the implementation of EIP-1559, miners’ income came from block rewards and handling fees. Among them, the block reward is fixed at 2 ETH, and the handling fee changes dynamically, and all belong to the miners.

After the implementation of EIP-1559, miners were unable to receive commissions (which were destroyed), and the income only came from block rewards and tips, which were completely paid by users. In other words, in theory, users may not pay tips. However, if users want miners to prioritize packaging of their transaction data, they will also pay “tips” as they did before paying higher fees.

3. Why is EIP-1559 needed?

At present, Ethereum uses a simple auction mechanism to price transaction fees. That is, if the user makes a bid, the miner preferentially selects the transaction data with the highest bid for packaging. In this regard, the proposer of EIP-1559 believes that this method will cause the following problems:

• The level of transaction fee volatility does not match the social cost of the transaction: on a mature public chain, the block utilization rate is higher, so the block is full and the transaction fee volatility is greater. For example, when the handling fee is 1gwei, the cost of accepting one more transaction into the block by the network is more than 10 times that of 1gwei. Regardless of 1gwei or 10gwei, this is obviously absurd. The two are just the difference between 8 million Gas and 8.02 million Gas.

• Unnecessary delay: Because each block is restricted by the Gas Limit and the natural fluctuations in transaction volume, transactions usually need to wait for several blocks to be packaged, which is very inefficient. No one will benefit significantly from such a fact. Under the EIP-1559 mechanism, the block size can be dynamically changed, and each block can have size differences.

• Inefficient auctions: At present, users publish transactions at high prices based on their own guesses, and then miners choose the transaction data with the highest payment fees for packaging. As we all know, this is very inefficient. Therefore, we need complex cost estimation algorithms. But even these algorithms often have poor final results, leading to frequent overpayments of fees.

4. What impact will EIP-1559 have?

• User

Different from the current auction mechanism, after implementing EIP-1559, users can better understand the degree of network congestion and how high the basic cost is. When the network is too crowded, users can decide whether to choose to pay a tip to get priority packaging rights. If they choose not to pay, they can wait for the basic fee to fall before completing the transaction. In a nutshell, EIP-1559 can help users predict the trading market, improve the transparency and visibility of transaction fees, and prevent users from paying excessive fees.

In addition, users must not think that EIP-1559 can achieve low fees, because the congestion problem of the Ethereum network needs to be solved by sharding technology.

• Miners

Under the setting of EIP-1559, the source of miners’ income has changed and their profits have decreased. In addition to the fixed block rewards, miners’ income also comes from tips paid by users, and users may choose not to pay for this part of the fees. According to a Coindesk research report, after the implementation of EIP-1559, with zero tip income, it is roughly estimated that the income of miners will drop by 20% to 35%.

Since EIP-1559 will reduce the income of Ethereum miners, market participants, including Spark Pool, have expressed their opposition to the proposal, saying that it is a redistribution of wealth from miners to holders and is a “robbery of miners.” “.

There are also rumors that due to dissatisfaction with EIP-1559, Ethereum miners may choose to transfer computing power, join an alternative blockchain such as Ethereum Classic, or choose to fork Ethereum.

However, in view of historical conditions (the later development of fork chains such as ETC and BCH is not as good as the source chain) and factors such as the fact that miners have paid a lot of costs for mining, the most likely scenario is that most Ethereum miners “surrender” and switch to It supports EIP-1559. Ethereum core developer Tim Beiko said, “If miners leave the network before EIP-1559 is deployed to Ethereum, the computing power of the entire network will be reduced, and other miners will gain more profits. The less, the easier it is for those who stay to get ETH.”

Tim Beiko also said, “Before EIP-1559 is deployed on the Ethereum blockchain, we actually need some miners, but if they gradually leave the network before the network upgrade, it may bring security risks to the current network. But in reality Most miners have already invested a lot of costs in infrastructure such as mining machines. Considering that miners have already spent a lot of fixed costs, they should have the incentive to mine to the last block.”

• Investor

As we all know, unlike BTC, ETH has no supply cap. Whenever a miner mines a block, two ETH will enter the circulation market. This means that over time, there will be more assets available for users to hold and trade in the market, and the original tokens in the hands of investors will be slightly diluted. In this regard, some people believe that EIP-1559 is expected to solve this problem. It provides a new narrative for the value of Ethereum and is called “the last piece of the puzzle in Ethereum’s monetary policy.”

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Data comes from Coindesk research report)

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(Data comes from Coindesk research report)

As mentioned earlier, in the EIP-1559 design, the basic fees paid by users will be destroyed, so the proposal is considered to lead ETH to deflation. But in fact, this statement is not entirely accurate.

The upcoming Ethereum EIP-1559: Why is it important? Influence geometry?

(As of July 3, simulation data shows that in the past 365 days, the activation of EIP-1559 caused the system to destroy 2,937,407 ETH)

First, it is difficult to accurately model the degree of deflation that EIP-1559 may bring. Because this requires predicting variables such as expected transactions, and even predicting network congestion, which is more difficult to measure.

Secondly, theoretically speaking, only if the transaction scale is large enough and the basic cost of destruction exceeds the mining reward, the monetary policy of ETH is deflationary. Otherwise, when the mining reward exceeds the amount of ETH burned, ETH will go into inflation.

Ethereum developers have pointed out that because users cannot control the demand for block space, it is impossible to assert whether ETH is deflation or inflation. Therefore, this situation will cause core developers to lose some control over Ethereum’s long-term monetary policy.

Although it is currently impossible to accurately quantify how much EIP-1559 may have on ETH, it is certain that the destruction mechanism can appropriately balance the growing supply of ETH.

5. What risks does EIP-1559 bring?

EIP-1559 will bring potential risks to those time-sensitive network participants (such as oracles).

During the network congestion period (after the implementation of EIP-1559), the basic fee will increase exponentially when the block is continuously filled or nearly filled, and will not stop until the block is no longer filled. This rally is based on a predetermined algorithm, not an auction. Therefore, if the demand does not decrease, the basic cost can reach an excessively high level fairly quickly. In this case, network participants like oracles that almost need to provide quotations for all DeFi dapps may eventually have to pay high fees in order to ensure that price information is transmitted to DeFi dapps in a timely manner. As a result, many oracle networks may have to change the frequency with which they provide quotes, which will change the number of DeFi dapps interacting with the oracle.

3. Conclusion

On the surface, EIP-1559 is a proposal on Gas fees, directly involving users and miners, but in fact, the proposal has the greatest impact on ETH itself.

From the perspective of users, although EIP-1559 will improve the transparency of Gas fees, for most retail investors, the problem they are more concerned about and hope to solve may be how to reduce high transaction fees; from the standpoint of miners, EIP- 1559 will indeed reduce its revenue, but when the network is congested, some users who are eager to complete the transaction will still pay fees. This part of the “tip” is equivalent to the current “handling fee”, and more importantly, even if not With the implementation of this proposal, as Ethereum is about to enter the PoS stage, the income of small miners will also be affected.

At the ETH level, although the impact of EIP-1559 on ETH is difficult to manifest in the short term, because ETH may sometimes go to inflation and sometimes to deflation, the ETH economic market will no longer be stable. In addition, when the network is active, the amount of burnt ETH may exceed the amount of newly issued tokens. Over time, the annual issuance rate of ETH will drop from 4% to zero or negative. By then, both users and miners will benefit from this.

Reference materials:

1.《EIP-1559: Fee market change for ETH 1.0 chain》

2.《The Investment Implications of Ethereum Improvement Proposal 1559》

3.《What is EIP-1559? How Will It Change Ethereum?》

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-upcoming-ethereum-eip-1559-why-is-it-important-influence-geometry/
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