Can EIP-1559 really reduce transaction fees? The answer is not necessarily

EIP-1559 has recently attracted a lot of discussion, and most people still focus on the fact that this proposal can reduce transaction fees. However, in fact, the essential purpose of EIP-1559 is not to reduce transaction fees. After understanding this, I believe most people should be able to understand why miners oppose EIP-1559.

Previously, EIP-1559 was implemented on FILECOIN, and it did reduce the transaction fees on the chain. According to most current statements, this should also be universal for Ethereum, but the actual situation may not be the case.

The first thing we need to understand is how EIP-1559 works. Its main purpose is to divide the user's transaction fee into two parts. The first part is the destruction part, and the second part is the miner's tip, which is the reward part given to the miner.

Secondly, we need to know why the miner fees are so high now?

The main reason is the increase in transfer demand on the Ethereum chain. The main reason for the increase in transfer demand is DEFI liquidity mining and other applications, especially liquidity mining. AMM-style exchanges such as Uniswap and decentralized exchanges such as DYDX have basically occupied most of the transfer traffic on Ethereum. Therefore, in order to be one step faster, the rich set a very high gas price for the transaction fee. This is the reason for the high transaction fees now.

Moreover, the DEFI projects on the Ethereum chain are indeed of high value, and the currency prices are recognized by the market. For example, CRV, AAVE, Compound, Uniswap, etc., actually contribute a lot of traffic to the Ethereum blockchain. At this time, as long as there is money to be made, there will naturally be a steady stream of funds coming in, and therefore there will be a continuous increase in gas prices.

So what will EIP-1559 bring to people if it is implemented?

For liquidity mining participants on DEFI, the impact may not be that great, because if the liquidity mining participants who competed with you before continue to play on the Ethereum chain, then you still have to raise the gas price so that miners can package your transactions first, thereby gaining a time advantage. Similarly, other liquidity mining participants have the same idea. Therefore, if DEFI on the Ethereum chain prospers, then the transaction fees will inevitably be very high for users.

For miners, the difference may be quite large, because part of the Ether transaction fee income originally belonged to the miners, but now this part will be destroyed, so the miners' income will be reduced a lot, and if they want to restore the previous level of transaction fee income, then users on Ethereum must theoretically increase the gas price to more than double, which is obviously unlikely in the short term.

In addition, for the price of Ethereum, since part of the miner's fee is destroyed, the inflation level will inevitably be reduced, and it may even cause deflation. Therefore, Ethereum will have the motivation to rise, that is to say, the price of the currency will rise. In this way, the price of the currency will rise, and the gas price may remain unchanged. In fact, for users, the fiat currency-based transaction fees may increase. Therefore, for users, EIP-1559 is not as good as imagined.

Who will benefit from EIP-1559 in the end?

Naturally, they are the big holders of Ethereum. The big holders here not only include large miners and coin hoarders, but also institutional investors, Grayscale, etc. Therefore, it must be beneficial to these people. At least the price of the currency will be increased, and they will naturally benefit a lot.

Another is that for large DEFI participants, there is not much impact, because compared with their thousands of coins, the handling fee of less than 0.1 is very low. For ordinary users, unless fewer people use the Ethereum chain and the mining fee decreases, there is almost no possibility of any extra money.

Conflict of interest: The author has a large position in Ethereum and also has computing power for mining.