EIP-1559 is coming tonight, what is there to worry about?

On August 5, the Ethereum network will complete one of the biggest upgrades in its history as five Ethereum Improvement Proposals (EIPs) are incorporated into the blockchain’s code. The most talked-about change in the industry is EIP-1559. The proposal does a lot to ease the woes of slow transactions on the network — and make it clearer to Ethereum users how much “gas” fees they must pay to push transactions through in a timely manner.

For months, Ethereum users have been hoping for an upgrade that would boost ETH prices, lower fees (slightly), and eliminate the guessing game of fees in transactions. But the scale of the upgrade is so large that many warn that getting from point A to point B won’t happen overnight. Developers will watch for any issues with the network’s consensus mechanism, and users will double-check the price of every transaction.

“The changes introduced by this hard fork are huge, fundamental, and disruptive,” Taylor Monahan, CEO of wallet provider MyCrypto, told Decrypt. “It could go wrong on multiple levels.”

About EIP-1559

The mechanism by which EIP-1559 reduces network congestion is to double the capacity of each block added to the chain. In addition, it replaces the current auction-based fee structure with an automatic base fee. This should help alleviate the problem of failed transactions, which can cost users of NFT platforms and decentralized lending and trading protocols built on Ethereum thousands of dollars due to underestimating the gas required for transaction confirmation.

Ethereum Foundation developer Tim Beiko wrote that the result of EIP-1559 is that “as long as a transaction has a fee higher than the BASE FEE and includes a tip to the miner, it will be included in the next few blocks.”

Part of the controversy about EIP-1559 is where the base fee goes. This base fee has nothing to do with the miners processing transactions. It is destroyed, which means that the growth rate of ETH supply will slow down. While each mined block will still provide miners with 2 newly mined ETH as a subsidy, the network will also take a small portion of ETH out of circulation. In the case of high congestion, even more ETH will be destroyed than newly minted.

Deflationary pressures should be a boon to investors who are long Ethereum. Scarcity makes things more valuable, which should theoretically lead to higher prices.

What is there to worry about?

But there are reasons to doubt the effectiveness of EIP-1559, especially in the short term.

First, as those helping coordinate the upgrade put it, “This is a very complex change, the largest ever completed on the Ethereum mainnet, that will improve the user experience and economics of the entire network.”

Additionally, a previous, less complex implementation of the Berlin upgrade saw a consensus error that caused 12% of ethereum nodes (computers that help run the network) to go offline shortly after implementation.

Is it possible that this update will be stopped if there is a coding error or other reason?

Beiko, who is in charge of coordinating the network update, isn't overly concerned.

“As for how likely it is that this upgrade will work as intended, I think it’s unlikely that it won’t,” he told Decrypt. “We’ve done technical and economic audits of the individual EIPs, tested them extensively, and seen that it works as intended on both the Ethereum testnet and other blockchains.”

Testnets are an important program for working out issues. For example, in late July, developers discovered an issue with Go Ethereum where invalid transactions were somehow included in blocks for some clients connected to the network. This issue has since been resolved; the testnet works as expected, avoiding the issue before it reaches the main network.

Jamie Pitts, a technical member from Ethereum Magicians, said that although bugs can be fixed, this type of economic change is difficult to test. "Something you can't easily model - what users will do, what will happen with price changes, complex feedback dynamics, etc. - may surprise us all tomorrow."

Pitts said a lot of the burden in the short term will fall on wallet teams like MyCrypto — “which is where DeFi and NFT users deal with gas prices in order to submit [transactions].” If any issues arise, like a sudden increase in gas prices or network congestion, they will help people troubleshoot.

Monahan admitted that her team isn’t quite sure which direction things will go. “Overall, the uncertainty surrounding the hard fork is likely to put downward pressure on the market right now,” she said. “If the hard fork happens and everyone thrives, this pressure should ease in the weeks following the fork.”

But some are anticipating price increases that could actually make things difficult.

“For example, if we break $3,000 or $4,000 next week, trying to determine what you need to pay in fees is likely to be miserable, chaotic hell. This is [because] EIP-1559 reverts to (essentially) current system conditions during a period of increased network congestion, except now everything is different, and the tools you once used to determine the appropriate gas price will need to be re-honed.”

In general, no one is warning that the sky will fall if something goes wrong. Don't be afraid, sporadic showers are possible during this period.