EIP-1559 will be launched next week. What benefits will it bring to Ethereum? What are the shortcomings?

Original title: "What EIP-1559 can and cannot do"
By Anthony Sassano and Nader
Editor: South Wind

The Ethereum community has generated a lot of hype about the Ethereum EIP-1559 proposal since it was first proposed in April 2019. Now, with EIP-1559 scheduled to go live on the Ethereum mainnet during the Ethereum "London" upgrade next week, this article will provide an overview of the proposal and let readers know the many other benefits of this proposal in addition to the well-known transaction fee destruction.

The core benefits of EIP-1559

1. Better transaction fee estimates

2. Creating a symbiotic relationship between ETH, the Ethereum network, and its users

3. Allows for more reliable transaction packaging

What EIP-1559 can’t do

1. It will not reduce gas prices in the long run

2. ETH is not deflationary by default

Before we dive into EIP-1559 in full, it’s important to clear up some misconceptions. First, EIP-1559 will not make transactions on the Ethereum network cheaper in the long run. Gas prices fluctuate based on the demand for submitted transactions and the supply of available block space. This proposal only makes Gas prices more stable by allowing block size to increase slightly when demand suddenly surges, but this does not improve Ethereum’s scalability, so it is not a solution to lower Gas prices in the long run.

Second, even if a certain amount of ETH is destroyed per transaction, it does not necessarily mean that enough ETH will be destroyed to offset its current issuance rate. If ETH is to become deflationary, it needs to maintain a base fee of about 150 Gwei to offset the increase in ETH issuance on the PoW Eth1 chain, and a base fee of about 20 Gwei to offset the increase in ETH issuance on the current PoS Eth2 chain.

Current Gas Price Auction

Currently, the Ethereum network uses a "highest price auction" model to price transactions, which means that the user who bids the highest Gas price is most likely to get their transaction packaged (by miners) first. However, the biggest problem with this model is that if the demand for Ethereum's limited block space suddenly surges, the Gas price may fluctuate greatly (because users will compete to bid higher Gas prices to get their transactions packaged). When users submit transactions, they often have to set transaction fees in a "gambling" manner, and often pay too high fees to ensure that their transactions are packaged. Overall, EIP-1559 attempts to provide a better user experience by changing the way transaction fees are estimated and how the network responds to surges in usage.

Important changes brought by EIP-1559

1. Base Fee, Tip & Maximum Fee;

2. Variable block size

3. Destruction basic fee

Base Fee, Tips & Maximum Fees

• Base Fee: The minimum gas price that a transaction needs to pay to be included in a block. The base fee is set by the protocol, it is variable, is part of the block header, and is the part of the total fee paid by the user that will be destroyed.

• Priority Fee (also known as Tip): This is the gas price that users are willing to pay to miners in order for them to process their transactions. This is set by the user and is part of the transaction, and the tip is paid to the miner (it is expected that this tip will be 2 Gwei by default).

• Max Fee: The maximum total Gas price a user is willing to pay per unit of Gas transaction. This is set by the user and is part of the transaction.

After the implementation of the EIP-1559 proposal, transactions will only be valid if the maximum fee set by the user is greater than the sum of the base fee and the tip. The excess will be refunded to the user, expressed in the formula:

Refund amount = Maximum fee - (base fee + tip)

This allows users to have more certainty when submitting transactions, as they only need to make sure their transactions include enough fees to cover the base fee and tips to get their transactions included. Users no longer need to worry about bidding too high a gas price, as the excess gas will be returned to them instead of being paid to miners (or validators).

As the new EIP-1559 transaction type is created, wallets and other service/infrastructure providers will need to be upgraded to support this transaction type. However, even after the EIP-1559 proposal is implemented, the traditional transaction type will still be valid, and the Ethereum network will treat the difference between the Gas price of the traditional transaction and the current "basic fee" as a "tip" (Priority Fee) paid to the miners; but the disadvantage is that if the user overpays, the traditional transaction type will not provide a refund. The actual situation will be shown in the following figure:

Above: Two transactions included in the same block (base fee is 15 Gwei)

Variable block size

Currently, the gas limit of Ethereum blocks is 150 million Gas. You can think of this gas limit as the block size of Ethereum, which limits the number of transactions that can be accommodated in a single block. Currently, whenever the transaction demand of the Ethereum network surges, the gas price will rise sharply because the Ethereum blocks are always full at this time and there is an upper limit on the size of the blocks.

EIP-1559 will allow the block size to be temporarily increased to accommodate a sudden influx of transactions. This is achieved through two different block parameters: Gas Cap and Target Gas Usage. The target gas usage is 50% of the Gas Cap, which means that if the target gas usage for a single block is 15 million gas, then the gas cap for the block will be 30 million gas. Ideally, the Ethereum network wants each block size to be close to the target gas usage (that is, 50% of the gas cap).

To ensure that the block size remains close to the target Gas usage, Ethereum will reduce the Base Fee if the Gas usage of the block is less than the target usage; if it is greater than the target, Ethereum will increase the Base Fee. It is also worth noting that in the latter case, the Base Fee actually grows very fast: for each full block (i.e. the block size reaches the Gas limit), the Base Fee of the next block will increase by 12.5%, which means that in the case of consecutive full blocks, the Base Fee will increase by 10 times in about 20 blocks (about 260 seconds) and 100 times in 40 blocks (about 520 seconds).

So, to summarize: this variable block size smooths out gas prices by allowing the protocol to temporarily increase the available block space, making the increase in gas prices between blocks more stable in the short term.

Destruction basic fee

At the same time as the tip is paid to the miners, the Base Fee is destroyed and removed from circulation. The main reason for this is that if the Base Fee is paid to the miners, they will be incentivized to make the Base Fee as high as possible to maximize their own profits (and miners may also send high transaction fees to the network so that they can recoup this fee when they mine a block). By destroying the Base Fee, this ensures that miners will not pay attention to this fee.

Burning the base fee also makes ETH an intrinsic part of the Ethereum protocol. Currently, technically, any cryptocurrency or even fiat currency can be used to pay for processing transactions on Ethereum. Users can submit a transaction with a transaction fee included and agree with miners to pay the transaction fee outside the Ethereum blockchain (which is what Flashbots enables). With EIP-1559, users must include a small amount of ETH as a base fee in their transactions in order for the transaction to be accepted as a valid transaction by the Ethereum network, creating a healthier relationship between the ETH asset and the Ethereum network.

Summarize

As you can see, EIP-1559 will greatly enhance the user experience of processing transactions on Ethereum. Of course, most people like to focus on the fee burning aspect of EIP-1559, but the overall benefits of EIP-1559 far exceed fee burning and will have a positive impact on end users. If you want to learn more about EIP-1559, you can check out these resources collected by Tim Beiko.