Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

The DeFi media platform The Defiant community may be a group of distinctive and opinionated groups, but we all agree on one thing-Gas price is a real drag on the Ethereum economy.

Take a look at what has happened in the past few months: Gas prices are soaring, preventing users from doing all the cool things that Ethereum aims to support, such as casting NFTs, sending money, or playing DeFi apps and services. The volatility of Ethereum Gas fees is also a boon for other blockchain projects such as Solana and Cardano that are trying to compete with Ethereum.

The worst part is that the Gas price-which is essentially the cost of processing transactions-is preventing Ethereum from truly becoming Ethereum. But this week we may finally have a solution: it is called, and it is a summary of all the updates of the Ethereum blockchain so far.

Target result: Ethereum users should get rid of the dilemma of cost-making difficulties when using their favorite network.

This upgrade proposal was proposed at the Ethereum Developers Conference held in London, the capital of the United Kingdom, in 2015, so it is called the “London” upgrade. It will be the most valuable cryptocurrency protocol hard fork after Bitcoin.

It aims to make Gas prices more predictable and less susceptible to manipulation. The goal that the London upgrade expects to achieve: Ethereum users should get rid of the dilemma of cost-making difficulties when using their favorite network.

To understand the importance of this change, you must understand how “Gas” fees are currently calculated: For every transaction performed on Ethereum, you need to pay “Gas” or “transaction fees” to miners. Miners receive this fee as a block reward when verifying transaction blocks. When the accumulation of transactions increases, the network will fall into congestion and gas fees will also rise.

Gas prices are extremely volatile

Over the past few years, gas transaction fees have changed a lot: the minimum fee is about 2 gwei (10^9 gwei = 1 ETH), but it was once as high as 500 gwei. This means transaction fees can be as high as hundreds of dollars.

As a user, if you do not set a higher-than-average gas fee for your transaction, sometimes the transaction will be delayed. In other words, the gas fee fluctuates greatly, which may prevent users from trading on the network.

Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

Image source: Ycharts

Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

Gas fee changes in the past 6 months, source: Ycharts

There is currently an auction mechanism to determine the gas price. If the Gas price is high enough, miners will bid to include the transaction in the block. Therefore, if users are willing to pay more, miners are more likely to include related transactions in a block. This means that if the network is busy-more than 15-20 transactions per second, which is the current peak limit of Ethereum-users must incentivize mines to accept their own transactions, which will cause users to increase gas fees for transactions.

Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

Picture from Metamask.com

There are many inefficiencies in this auction mechanism. One of the problems is that there is no simple strategy to choose the best bid. For example, if you are willing to bid $0.50 for a transaction, but everyone else bids $0.05, it makes more sense for you to bid $0.08. In today’s bidding system, this is not easy to do. If you want to have a more detailed understanding of this issue, please check this article by Vitalik, which has a detailed explanation.

Miners may also artificially increase Gas prices by including their transactions in a block, which is also a real problem.

Ethereum can process 15 to 20 transactions per second, which sometimes causes transaction congestion and increases gas prices. Sometimes, the transaction fees for just on-chain transfers have soared to hundreds of dollars.

Problems caused by high gas prices and unpredictability

When the gas price is so high, it may force developers to switch to other blockchains, such as Solana or Cardano. If users may need to pay up to $30-50 to exchange tokens on Uniswap or Sushiswap, they will naturally also be negatively affected.

The high gas price is not the only problem. Another problem is that the cost is very unpredictable. Sometimes they are quite low, sometimes they soar. As of our press time, the average cost per transaction is $7.982.

You can see how the gas cost rebounded in the past 50 days or so in the chart below.

Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

Image source: Ycharts

The EIP-1559 proposal hopes to change this status quo by abolishing the Ethereum gas fee auction system and replacing it with the basic fee mechanism. This means that you now have to pay not only a fee to the miner, but also a basic fee (the fee will be burned), and then you can tip the miner.

How will the gas fee level be determined after the EIP-1559 upgrade?

Abandoning the auction method, EIP-1559 will introduce a basic Gas fee, which will vary according to the network transaction flow. The basic fee will be destroyed, which means it will not flow to miners.

There is also something called “priority fee”, which can be used as an analogy with tipping. Therefore, if users want their transactions to be at the top of the queue, they can add priority fees.

EIP-1559 also increases the network capacity by changing the maximum gas limit of each block from 12.5M to 25M. This means that when the network utilization rate is> 50%, the basic cost will be gradually pushed up. On the contrary, when the network utilization rate is less than 50%, the basic cost will be reduced. Therefore, the Ethereum network will adjust the fee according to the traffic to achieve a balance of 50% of the capacity level.

Regarding what will happen to miners’ income after the EIP-1559 upgrade, related discussions are also very intense. Obviously, the trend of change tends to reduce their income; the numbers range from 20% to 35%.

Nevertheless, all expectations and promises regarding the coming of a new and more stable era have caused many questions about the upgrade and transformation of EIP-1559.

First of all, will EIP-1559 lead to a reduction in gas prices? This is a hot topic on Twitter, Ethereum forums and Reddit. The answer is unknown.

It is also important that for the fixed gas price, the main goal of EIP-1559 is to make the cost more predictable and less volatile, not cheaper.

Nevertheless, the gas price for some transactions may be lower, while the gas price for other transactions may be higher.

Will EIP-1559 become the grave of the mining industry?

Many people in The Defiant community predict that the value of ETH will increase after the EIP-1559 upgrade. The reason is that the destruction mechanism is a way to make ETH a deflationary asset But again, many other factors will also affect the price of cryptocurrencies, so we cannot be sure until the change occurs.

Regarding what will happen to miners’ income after the EIP-1559 upgrade, related discussions are also very intense. Obviously, the trend of change tends to reduce their income; the number of income reduction forecasts range from 20% to 35%.

Therefore, some of the largest mining pools such as Flexpool and Xinghuo Mining Pool have issued announcements stating that they will not support the proposal.

Understand the changes of EIP-1559 to the Ethereum economic model in three minutes

Source: Medium page of Spark Pool

However, given the existence of the priority fee mechanism, miners still have a lot of money to make. In addition, when Eth2.0 goes online, mining will be completely removed from the network, so when mining mechanisms still exist, it makes sense for miners to embrace EIP-1559.

A more imminent risk is that miners with different opinions may launch a legendary 51% attack on Ethereum, which may lead to another fork.

The predictability of Ethereum’s future

When quietly appreciating this historic moment, it is important to realize that the EIP-1559 upgrade aims to increase the reliability of transaction fees and reduce transaction congestion. Therefore, it is not surprising that both the veterans of The Defiant community and Mengxin are excited about what is about to happen.

If Ethereum wants to continue to be the power engine of DeFi and NFT, it needs to solve the gas fee problem. Hope EIP-1559 is a step in the right direction.

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/understand-the-changes-of-eip-1559-to-the-ethereum-economic-model-in-three-minutes/
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