What is the EIP 1559 proposal opposed by miners? How will it increase the value of Ethereum?

What is the EIP 1559 proposal opposed by miners? How will it increase the value of Ethereum?

Currently, Ethereum is facing the biggest competition in its 6-year history from other smart contract and NFT platforms such as Cardano, Binance Chain, and Dapper Labs' Flow. It plans to implement the EIP 1559 proposal in July 2021, which will help stabilize transaction fees and potentially make Ethereum a fixed supply token rather than an infinitely inflated token.

The EIP 1559 proposal is an improvement to Ethereum that helps stabilize fees by moving to a base fee model and reducing network congestion. Currently, Ethereum fees are not only incredibly high, but also volatile. One day, you might have to pay $50 in Uniswap fees, and the next day or even an hour later, it's $100. This makes Ethereum unusable as a smart contract platform for everyone except for miners who make a lot of money and those who trade millions of Ethereum every day. As a result, other smart contract platforms have received more attention in terms of network volume and token price appreciation. For example, Binance Coin and Cardano have both grown 800% year-on-year, and Dapper Labs, the creator of Crypto Kitties, has seen their Flow smart contract and NFT platform grow 3,300% since January. All of these platforms are technically superior to Ethereum and should theoretically have a higher market cap, but Ethereum's first-mover advantage keeps it in first place for now. If it doesn't solve its scaling issues soon, this may change soon.

Fortunately, the team behind Ethereum voted to implement the EIP 1559 proposal, which will solve many of the platform’s fundamental problems.

For transactions on the Ethereum blockchain, the current charging scheme is an auction mechanism. Users bid, and miners select the highest-bid transaction to pack into the block. This method is simple and efficient, but it may cause delays for users and encourage "selfish" mining behavior due to reduced block rewards and differences in handling fees.

The EIP 1559 proposal changes Ethereum's current fee market to address this problem. Now, every transaction will have a minimum fee, and the base fee will be destroyed and not available to miners. If the network becomes more congested, everyone's fees will increase accordingly. In addition, if users really want their transactions to be prioritized, they can provide miners with a "tip" on top of the base fee as a reward for their work.

This will help mitigate volatility. Instead of having to research the best ETH fees every time they want to send a transaction, users can simply send a transaction without worrying about it not going through.

This fee burning mechanism will also have an impact on the long-term supply of Ethereum. As of now, Ethereum has no supply cap. This means that the total supply of Ethereum will increase infinitely over time, which makes some people skeptical about the long-term value proposition of an asset with an uncapped supply. Under the new burning mechanism, a certain amount of Ethereum will be consumed per block, which will significantly reduce Ethereum's annual inflation. If the fees consumed are higher than the rewards given to miners per block, then Ethereum may even become a deflationary asset. According to the basic law of supply and demand, with the same demand, less supply means higher prices, which may help Ethereum continue to rise after the bull market subsides.

There is one group of people who don't like these changes, and that's the Ethereum miners who help secure the network. They will see their income drop significantly and may leave the Ethereum network and use their mining power to secure other blockchains that offer higher incomes. As a result, the Ethereum network may become less secure.

While this is concerning, it will likely not have much of an impact, as Ethereum will transition to Proof of Stake in the next few years and all miners who believe in Ethereum’s future will continue mining.