The EIP-1559 upgrade is just around the corner. Can Ethereum be transformed into a new look?

Original title: EIP-1559: What Happens Next for Ethereum

Source: Decrypt

By Mason Marcobello

Compiled and edited by Chen Zou

Ethereum’s London hard fork is coming this week, and along with it comes the EIP-1559 Ethereum Improvement Proposal, which aims to address persistent transaction fee issues on the network. This is a major change for the Ethereum network, and one that has already had the community at loggerheads. But how will the upgrade unfold, and where should Ethereum users go next?

What is EIP-1559?

EIP-1559 aims to make Ethereum transaction fees less volatile and more predictable, eliminating the problem of people paying too much for a transaction. It also helps reduce uncertainty for users who don’t know whether their transactions will be approved because their gas fees are set below the generally accepted or expected price.

EIP-1559 will not only help speed up the waiting time for each transaction, but will also provide a more seamless experience for Ethereum’s global community and its dapp layer.

How does it work?

The Ethereum Improvement Proposal is based on two core elements. The first is BaseFee — the minimum gas price required for a transaction — and a new way to regulate transaction fees, so that during peak trading hours, transaction fees go up and during low trading hours, transaction fees go down.

The difference between the current system and this new version is that miners will not set the fee rate; the network will use a special algorithm to achieve a delicate balance in the entire Ethereum ecosystem - consensus. In addition, miners will not receive transaction fees; instead, these transaction fees will be burned, which will reduce the supply of Ethereum to a certain extent and prevent any malicious profit-making network congestion.

EIP-1559 also introduces an "inclusion fee," an optional "tip system" that you can add to the base fee so that miners can prioritize your transaction over others in the network. The inclusion fee effectively replaces the original simple and crude transaction fee as a source of income for miners.

What happens next?

EIP-1559 aims to reduce volatility with gas fees, but it does not necessarily guarantee that users can get cheaper transaction prices, as Ethereum can still only process a limited number of transactions at a time. According to EIP-1559, fees based on the minimum standard can only increase and decrease by a factor of 1.125 per block, making Ethereum transactions more stable and predictable.

This is important because gas price uncertainty has long limited the scaling and adoption of Ethereum dapps while benefiting competing protocols. Given that Ethereum already has a significant first-mover advantage in building a dapp and developer ecosystem, EIP-1559 could further limit the appeal of “Ethereum killers” like Polkadot, Dfinity, and Solana by addressing the pain points of current Ethereum users, thereby undermining the competitiveness of other networks on price and transaction speed.

Curbing Ethereum’s growing supply

Bitcoin has long been promoted as having a finite supply of 21 million coins, similar to the traditional concept of the gold standard. This is in stark contrast to Ethereum, whose supply is theoretically unlimited, at least until the London fork begins.

Currently, for every new block mined on Ethereum, two additional Ethereum are released into the market; this dilutes the value of Ethereum because there is more of the asset. Ethereum’s annual issuance rate is currently around 4%, while Bitcoin’s annual issuance rate has fallen to around 1.8%.

With the introduction of EIP-1559, the burning mechanism will also be introduced into the system through underlying programming, automatically removing tokens from circulation after new coins are issued, thereby suppressing the supply increase effect of Ethereum, rather than simply introducing the concept of a supply cap.

In the future, during bull markets or times of high network activity, the total amount of Ethereum burned to pay base fees may be greater than the amount of new Ethereum issued through block rewards. This may also cause the supply of Ethereum to gradually and continuously decline, so that the annual issuance rate drops from 4% to zero, or even negative.

Tim Ogilvie, CEO of Ethereum infrastructure services company Staked, told Decrypt, "It's like a company making a profit and buying back shares. Burning billions of dollars of Ethereum may indirectly push up the price of cryptocurrencies. From the supply and demand logic, as the supply decreases, the remaining shares will increase in value."

Opponents, however, argue that burning and balancing the supply could lead to a more unstable economy for the entire network, as it is difficult to accurately predict the total amount of ether that will be created over time.

Cohesion of the ecosystem

While most Ethereum fees are currently paid in ETH, there is nothing stopping miners from accepting other currencies as payment. The incentive for users to pay miners in currencies other than Ethereum is to have their transactions included in the next block with zero gas fees. This essentially exists as a backdoor to mitigate spending more than necessary.

With EIP-1559, this changes: the network base fee must be paid in Ethereum for transactions to be processed. While miners can still accept other alternative currencies to prioritize user transactions, the basic base fee still needs to be paid in Ethereum, and both users and miners must comply with this clause in order to have their transactions included in the next block.

This ultimately further strengthens Ethereum’s important role as the blockchain for approving transactions on the network. EIP-1559 is also expected to solidify Ethereum’s position as a payment method when using computing resources and interacting with its extensive ecosystem of dapps.

Essentially, Ethereum is slowly closing the loop and filling the holes in its ecosystem, much like Apple creating an integrated and complementary infrastructure for iOS devices, allowing for end-to-end control and system efficiency.

Rewards and risks

However, it is not all smooth sailing. First, as with any major technology upgrade, there is always the risk of bugs. These bugs can also lead to malicious behavior by users and attempts to exploit vulnerabilities in the system.

In response to this situation, the Ethereum community has conducted several audits and reviews of EIP-1559 to flag any potential issues. In addition, the upgrade is fully open source. With a combination of virtual testing and community support, the upgrade is undergoing a thorough analysis to ensure that there are no outstanding risks at or after launch.

However, there is also the possibility of a counterattack from dissatisfied miners. After the launch of EIP-1559, miners who have already upgraded to the latest client software in advance will automatically start producing blocks under the new fee structure. Other miners who have not upgraded will continue to mine the old version of Ethereum.

These splits are called "contentious hard forks," and they have happened in the past. In 2017, the Bitcoin network split due to disagreements over a scalability upgrade called "Segwit." Ethereum itself also hard forked and created Ethereum Classic in 2016.

But Slava Karpenko, CTO of Ethereum mining pool 2Miners, and other Ethereum miners have reportedly accepted the activation of EIP-1559. Brian Lee, an average individual Ethereum miner running 11 GPUs in his garage in California, told CoinDesk in June: "All of us are on board, and I'm pretty confident they're going to get it done. It's just a matter of time."

Towards the future

One thing EIP-1559 does not do is change Ethereum’s limited transaction processing capacity. The network’s scalability has long been a focus of Ethereum creator Vitalik Buterin, and it’s what the upcoming Ethereum 2.0 upgrade is all about.

Ethereum 2.0 will see the network switch from a Proof of Work (PoW) consensus mechanism, as employed by Bitcoin, to one based on Proof of Stake (PoS). In addition to being less energy intensive, Ethereum 2.0 will also enable the network to scale from around 30 transactions per second to 100,000 transactions per second through the implementation of shard chains.

EIP-1559 will continue to have an impact after Ethereum completes its transition to proof-of-stake, as it largely changes Ethereum’s previous fee model rather than its scalability in terms of transaction volume.