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What Does EIP 1559 Mean for the Future of Ethereum?

Ethereum

The acronym EIP stands for “Ethereum Improvement Proposal,” a common way of proposing changes to the Ethereum network. In essence, an EIP is a design document that covers the technical specifications of a proposed change and the reasons behind it.

While most people don’t discuss EIPs outside of the Ethereum developers’ community, EIP 1559 is arguably one of the most popular topics among crypto enthusiasts, making it an exception. However, some smart traders are looking to long ETH on platforms like Bitlevex, because this upgrade could influence the price.

In this article, you will learn about EIP 1559 and its implications for ETH’s monetary policy and applications.

Understanding Ethereum’s Current Fee Model – A Brief Review

Before explaining EIP 1559, it is fundamental to understand how the current fee model is utilized in the Ethereum network. Currently, the fee model is based on a straightforward auction mechanism, known as the “first-price auction.”

also check – Ethereum: Better Than Bitcoin? Let’s Find Out!

Accordingly, users who want a miner to select their transaction must essentially bid to have a chance within a block. Hence, users submit a gas price they are willing to pay for a specific transaction.

Thus, the mechanism incentivizes miners to select transactions by sorting them by the highest gas prices, which puts the most profitable transactions first in the processing line. Ultimately, it’s quite inefficient, which results in users overpaying for their transactions.

Also, the current fee model has issues that affect user applications, such as wallets. For instance, MetaMask allows users to adjust their fee by choosing between different confirmation times (slow, average, and fast), or by manually specifying a gas price.

Hence, users who were unlucky enough to submit a transaction with a default fee before a spike in gas prices may end up waiting a long time for their transactions to be confirmed.

EIP 1559 – A New Viewpoint on Ethereum’s Fee Model

As it is plain to see, the current fee model adopted in Ethereum’s network is far from ideal – especially considering the user experience viewpoint. Proposed by Vitalik Buterin in 2019, EIP 1559 wants to change this scenario by:

  • Making transaction fees more predictable
  • Reducing delays in transaction confirmation
  • Improving user experience by automating the fee bidding system
  • Creating a positive feedback loop between network activity and the ETH supply

Understanding EIP 1559 – Base Fee

Simultaneously innovative and disruptive, EIP 1559 introduces the concept of a base fee. In essence, the base fee represents the minimum fee that users must pay to have their transactions included in a block for processing.

As provided in the proposal, the base fee is set per block, and it’s also adjustable up or down depending on the level of congestion in the Ethereum network.

Another essential change introduced by EIP 1559 is the increase in the network’s capacity by changing the max gas limit per block from 12.5M to 15M GAS, essentially doubling the block size.

With the introduction of a base fee mechanism and an increased network capacity, EIP 1559 works in the following system:

  • When the network is at more than 50% utilization, the base fee is incremented.
  • When the network is at lower than 50% utilization, the base fee is decremented.

This way, the network aims to achieve balance at 50% capacity by adjusting fees according to the network utilization.

Understanding EIP 1559 – Minor Tip

EIP 1559 introduces a “minor tip”, which is a separate fee that is paid directly to miners to incentivize them to prioritize a transaction. This is an essential feature, especially considering operations that benefit from quick confirmation (e.g., arbitrage transactions).

In short, the proposed model swaps high volatility in fee prices for volatility in block size. Hence, the difference in the base fee from block to block is easy to calculate, as increments and decrements are constrained.

This way, wallets can automatically set the base fee for transactions based on the information contained in previous blocks, which enhances the user experience.

To avoid miners from colluding to artificially inflate the base fee, the entire base fee is always entirely burned, while the “minor tip” is always entirely received by miners.

Understanding EIP 1559 – Fee Cap

Also, another essential aspect brought by EIP1559 would be the fee cap. The fee cap is a mechanism designed for users who, instead of just paying the current base fee, would like to limit how much they want to pay for a particular transaction.

This way, a transaction with a fee cap lower than the base fee would have to wait until the base fee is lower than the max fee set in the fee cap to be included in a block.

Conclusion

Ultimately, the innovations brought by EIP 1559 will impact the Ethereum network positively, especially in terms of user experience and processing speed. While many are still speculating about when and how the network will implement the new upgrades, there is no set date for the transition.

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