Ethereum London Upgrade: What is Ethereum EIP-1559 that will take effect

At 8 o'clock last night, the Ethereum mainnet completed the London hard fork upgrade at block height 12,965,000. This upgrade made the Ethereum EIP-1559 proposal effective, which also means that it is one step closer to the transition from PoW to PoS.

In the past year, in addition to BTC sitting firmly on the throne as always, DeFi has been a hot topic throughout the year. While DeFi has enabled ETH to achieve value growth, it has also caused its network to become increasingly congested and transaction fees to increase, becoming an "unbearable burden" for the Ethereum ecosystem.

How to reduce ETH transaction fees has become an urgent problem to be solved. In addition to Layer 2 and other solutions, EIP-1559 has also attracted industry attention. So what exactly is EIP 1559 and what is its use? Let's find out!

1. What is EIP-1559? What is it used for?

The Ethereum Improvement Proposal EIP-1559 was proposed by Vitalik in 2019. He tweeted: In the current income structure of Ethereum miners, transaction fee income is close to half of the block reward, which may threaten the security of Ethereum.

At the same time, it emphasized that "proposals for fee markets (such as EIP 1559) can solve this problem."

EIP 1559 aims to improve the efficiency of the Ethereum fee market, making transaction fees more predictable and handling surges in demand more efficiently, thereby capturing greater value from Ethereum.

The agreement mainly contains the following four points:

1. Make all transactions pay the same rate as much as possible to improve user experience.

Blockchain platforms such as Bitcoin and Ethereum use a first-price auction system (a "sealed" auction in which buyers do not bid in sequence, but bid simultaneously in written bids, and the highest bidder will obtain the auction item at its bid level.)

In this way, during the bidding process, bidders do not know the total number of bidders and the price of the target, which causes bidders to pay a lot more money, so cost estimation becomes a big problem.

EIP-1559 attempts to solve this problem by applying the same fee rate to all transactions as much as possible. In most cases, users only need to decide whether to pay the fee, rather than how much to bid, and since the fee estimate is more accurate, the transaction fee is expected to be lower.

2. Implement a flexible block size limit mechanism to balance the use of block space.

Faced with surging transaction demand and large differences in block usage, miners can allow some blocks to be expanded as long as users pay, as long as other blocks are relatively small, to achieve a long-term average block size limit.

3. Propose to use permanent block subsidies to incentivize miners and improve network security.

In the case where the block subsidy is exhausted, blockchain platforms that rely solely on transaction fees to ensure security may encounter problems.

EIP-1559 attempts to separate transaction fees from network security and use more reliable permanent block subsidies to incentivize miners. The original transaction fee is changed to a basic transaction fee and tip setting, the transaction fee is destroyed, and the tip is given to the miners.

4. It is stipulated that transactions must consume a specific amount of ETH, increasing the difficulty of economic abstraction.

Economic abstraction means being able to use any blockchain asset to pay for the fees of initiating any blockchain transaction as well as the transaction itself.

EIP-1559 stipulates that transactions must consume a specific amount of ETH, hoping to increase the difficulty of economic abstraction.

Because when users can use any token to pay transaction fees, the reserve status and currency premium of the native token will be threatened.

2.What is the progress of EIP-1559?

At the beginning of 2020, ConsenSys' Protocol team agreed to help promote the development of EIP-1559. The team said that EIP-1559 is currently being carried out in four aspects: implementation, simulation, formal analysis, and community expansion.

On January 6, 2021, EIP-1559 was implemented and launched on the Filecoin mainnet, with about 100,000 to 150,000 FIL consumed by network transactions every day. Juan Benet, the founder of Filecoin, mentioned in his speech:

Adopting this standard achieved at least two key victories:

1. Fast lanes for high-value transactions. As expected, integrating EIP-1559 provides Filecoin participants with a direct mechanism to resolve this congestion problem without always paying a high price.

2. Network capacity management. So far, EIP-1559’s basic fee mechanism has done a good job of keeping network capacity at 100% of its target.

He also said that EIP-1559 has many attractive features that are very consistent with Filecoin's design considerations. However, due to the large difference in basic fees and the high rate of change, the key WindowPost messages are priced.

At 8 o'clock last night, the long-awaited Ethereum mainnet completed the London hard fork upgrade at block height 12,965,000, and EIP-1559 also came into effect. This also began to allow the Ethereum network to dynamically adjust the Base Fee of each transaction according to transaction demand and block size, and this part of the fee will be directly burned and destroyed. Data shows that within 13 hours after the completion of the London hard fork upgrade, more than 3,300 Ethereums were burned.

Data source: etherchain.org

As a result, transaction fees paid to miners are expected to decrease, bringing the idea of ​​changing the consensus algorithm from Proof of Work (PoW) to Proof of Stake (PoS) closer.

3. Summary

EIP-1559 breaks the current user-unfriendly status quo of the fee market and captures the value of Ethereum network fees. David Hoffman called it "the last piece of the puzzle in Ethereum's monetary policy" and a key link for ETH to "obtain a monetary premium."

However, it is difficult for EIP-1559 to fundamentally reduce the average transaction fee, because the continued high transaction fees are essentially a scalability issue rather than a mechanism design issue.