In-depth: The future trend of Ethereum from the experience of Filecoin applying EIP-1559

Wu said author | Colin Wu

Editor of this issue | Colin Wu

Recently, the discussion about the upcoming upgrade of EIP1559 on the Ethereum network has been very heated. Behind the heated discussion is actually the controversy and changes in the distribution of benefits brought about by this upgrade. Can burning the huge gas fees of the Ethereum network really solve the current network congestion and high gas fee problems? As a pioneer, what impact has the implementation of EIP1559 brought to the Filecoin network? Will similar gas fee burning proposals bring different results?

What is EIP-1559?

Ethereum Improvement Proposal #1559 (EIP1559 for short) proposed a new on-chain fee pricing mechanism: the original transaction fee (collectively referred to as Gas fee in the industry) was changed from "auction-style" pricing to a "market exchange rate" pricing mechanism, and the fluctuation of the fee was linked to the block capacity. The Gas fee will be split into a base fee and a miner fee.

The basic fee will be dynamically adjusted according to the current network usage and will be destroyed directly. The basic logic is that when the Ethereum network usage exceeds 50%, the basic fee will increase; when the network usage is less than 50%, the basic fee will decrease, and the basic fee will fluctuate within a small range. In addition, the mining fee still belongs to the miners who package the transaction information, and the pricing mechanism of the mining fee remains unchanged, and the Gas Price and Gas Used are set by the user.

EIP-1559 was proposed in 2019. Its core purpose is to solve the congestion and high gas fee problems of the Ethereum network. After nearly two years of community discussion and development, it is about to be upgraded. Although Ethereum miners are strongly opposed to EIP-1559, it can be expected that with the completion of the upgrade of the EIP1559 proposal, it will bring impacts and changes to the Ethereum ecosystem. The summary is as follows:

(1) The destruction of the base fee reduces the circulation of ETH and gives ETH a higher value. As the transactions on the Ethereum network prosper, the amount of base fees destroyed will be greater than the amount of additional issuance, and ETH will move towards a deflationary mode, increasing the scarcity of ETH and thus increasing the value of a single ETH.

(2) Change the pricing model of Ethereum network gas fees, and shift the dominance of transaction confirmation from miners to transaction creators. For a transaction on the Ethereum network, miners can choose "high-priced" transactions under the old gas fee pricing mechanism, so transaction creators have no choice but to increase gas fees, forming a vicious cycle. EIP-1559 will ease this mechanism, and transaction creators can set a base fee based on the urgency of the transaction, which means that the dominance of transaction packaging will shift from miners to users, and the network congestion problem will hopefully be alleviated.

(3) The transaction costs of the Ethereum network are expected to be significantly reduced.

However, can EIP1559 really solve the problems of network congestion and handling fees as expected? Before it is implemented, we can only make an analysis and estimate. But we can also get a glimpse of the current status of the transaction fee adjustment mechanism implemented by the Filecoin network, the forerunner of EIP1559.

The current status of Filecoin’s implementation of the EIP1559 proposal

Juan, the founder of Filecoin, mentioned in his public speech "EIP1559 in Filecoin": "EIP-1559 has been implemented and exists on the Filecoin mainnet. Currently, 100,000 to 150,000 FIL are consumed by the Filecoin network every day. EIP-1559 has achieved at least two key victories..."

In Juan's view, the design of EIP1559 is highly consistent with the design of the filecoin network. Filecoin has adopted the EIP1559 mechanism when the main network was launched, and the changes are very small. After the mechanism was implemented on the filecoin network for several months, Juan believes that EIP1559 is an extremely effective transaction fee pricing mechanism that can meet the fast confirmation of important transactions and the dynamic management of network message capacity.

However, is this really the case?

Let's first take a look at the current Filecoin network gas fee situation. The figure below shows the changes in the Filecoin network's Basefee in the past 7 days. From the figure, we can see that the base fee rate, which is used to calculate the Filecoin network gas fee, fluctuates between 1-6 nanofil. The huge fluctuation of Basefee will bring about huge changes in gas fees. Ultimately, on the Filecoin network, for every 1T increase in computing power, the gas fee expenditure of Filecoin miners is between 5-12fil.

Filecoin network gas fee changes (Image source: filfox.io)

Unlike EIP-1559 of the Ethereum network, most of the gas fees paid by the creator of the Filecoin network transaction go to the public destruction address (see f099), and the miners who package the transaction receive a very small amount of gas fees. Taking March 2, 2021 as an example, the proportion of the transaction fee allocated to the miners in the transaction fee shown in the figure below is infinitely close to 0.

Gas fee consumption of a single transfer transaction on the Filecoin network (Image source: filfox.io)

In addition, the Gas fees paid by the Filecoin network for different types of messages vary greatly. Taking the Filecoin browser data at 12:00 on March 2, 2021 as an example, the Gas fee for the ProveCommit Sector message on the chain is 0.146Fil (worth about 36RMB), the gas fee for the PreCommit Sector message is about 0.118Fil (worth 29RMB), and the ordinary transfer message fee is about 0.0017Fil (worth 0.4RMB).

Filecoin network 24h Gas fee statistics (Image source: filfox.io)

In summary, the performance of EIP1559 after running on the Filecoin network for several months is as follows: (1) Gas fees can be flexibly adjusted according to demand, but Gas fees have been fluctuating at a high level. (2) Most of the Gas fees paid by transaction creators are destroyed (more than 99.99%), and miners receive very little. (3) EIP1559 does not solve the problem of message congestion on the Filecoin network, and miners are the ones who pay huge Gas fees every day. (4) The destruction of Gas fees makes the circulation of Fil deflationary, giving Fil in circulation more value.

Analysis of the performance differences between EIP-1559 and Filecoin and Ethereum networks

Since the original intention of designing EIP1559 was to solve network congestion and reduce gas fees, why is there a big difference in the performance of the same EIP1559 on the Ethereum and Filecoin networks? (EIP1559 has not been implemented on Ethereum and can only be estimated at present). Here is a simple comparative analysis for reference only. If there is anything inappropriate, please correct me.

From the previous analysis, we can know that the difference of EIP1559 lies mainly in the difference of Gas fee after implementation. Here we focus on analyzing the reasons for the difference of Gas fee.

Under the EIP-1559 mechanism, the level of gas fees is mainly determined by changes in the number of network transaction messages and the transaction creator's willingness to pay gas fees.

Let's first look at the number of network transaction messages. Comparing Ethereum and Filecoin, the number of daily transaction messages and their sources are very different: on March 1, 2021, the number of Ethereum network transactions was about 1.2 million, and the gas fee generated was about 9,620 ETH, worth about 14.5 million US dollars. It is mainly composed of on-chain transfers and smart contract calls. If there is a hit application, the number of transactions will increase rapidly.

Fluctuations in the number of Ethereum network transactions (Image source: QKL123)

On March 2, 2021, the number of Filecoin network transaction messages was about 1.18 million, and the total Fil consumed by gas fees was 64,900, worth about 2.336 million US dollars. About 97.5% of them were sector chain information generated by miners to increase computing power, and the proportion of real user transfer transaction information and contract call transaction information was very small (less than 2.5%). The number of Filecoin network transaction messages fluctuates with the growth rate of computing power. Recently, the growth of Filecoin network computing power has stabilized, and the number of daily messages fluctuates within a small range.

The number of messages between the two seems to be similar, but the sources of these transaction information are very different, and the value of the transactions is also quite different.

Let’s take a look at the willingness to pay for gas fees behind these transaction information. Transactions on the Ethereum network are mainly contract calls and user transfers of many applications. The gas fees consumed here are the user’s assets, and what is exchanged is transaction information. In comparison, the motivation for users to bear huge gas fees does not seem to be sufficient (except for some popular or Fomo applications)

The news of the Filecoin network comes from the increase in computing power of miners. Driven by the income from mining output and the income from selling mining machines, Filecoin miners are willing to actively set a higher Basefee to increase the priority of messages and obtain greater computing power, thereby selling more mining machines and mining more Fil. It can be understood that Filecoin miners choose to pay higher gas fees in exchange for more income and have a stronger willingness to pay gas fees.

Based on Filecoin’s experience, after Ethereum’s EIP-1559 upgrade: (1) the overall trend will shift from inflation to deflation, which will stimulate prices; (2) network congestion will not be alleviated, and the progress of Layer 2 will still depend on the short-term; (3) miners’ income will be greatly reduced, estimated to be about 20%-35%.

The differences in the consensus mechanisms and network development stages between the Filecoin network and Ethereum make it easier to understand the different performances of EIP1559 in the two. Next, the upgrade of EIP1559 in the Ethereum network will inevitably encounter many obstacles. We hope that the Ethereum community can reach a greater consensus after discussion or voting for and against, and bring us a better Ethereum network.

Some references:

EIP-1559 in Filecoin:

https://filecoin.io/zh-cn/blog/posts/filecoin-eip-1559/