EIPs

First, understand the EIP definition.

EIP stands for Ethereum Improvement Proposal. It is a common way to request changes to the Ethereum network, inspired by Bitcoin Improvement Proposals (BIPs). As a design document, an EIP covers the technology of the proposed change and the reasoning behind it.

Most EIPs are intended to improve technical details of Ethereum and are not widely discussed outside the core Ethereum developer community.

EIP-1559 is an exception, as the proposal has significant implications for Ethereum monetary policy and client applications such as wallets.

Ethereum Fee Model

EIP 1559 proposed changes to the Ethereum fee model and was proposed by Vitalik Buterin in 2019.

To understand why this proposal is needed, we need to quickly review the current Ethereum fee model.

The current fee scheme is a simple auction mechanism, also known as a first-price auction. Users bid for block space and wait for their transactions to be selected by miners.

The user submits the gas price to be paid for a specific transaction.

To incentivize miners to select transactions, gas prices are sorted by high to low, with the most profitable transactions displayed first.

This can be very inefficient and often results in users paying too much in fees for their transactions.

There are also a lot of issues with this model when it comes to wallets. For example, Metamask allows users to adjust fees, choose between slow, average, and fast confirmation times, or manually set the gas price.

Inexperienced users who are unfortunate enough to submit transactions at the default fee before gas fees spike may end up waiting a long time for their transactions to be confirmed. This is certainly not an ideal user experience.

This is where EIP 1559 comes in. It proposes solutions to these problems, achieving the following goals:

• Transaction fees are predictable

• Reduce transaction confirmation delays

• Improve user experience through automatic payment system

• Create a positive feedback loop between network activity and Ethereum supply

Now, let’s look at what changes the EIP 1559 proposal makes.

EIP 1559

The EIP 1559 proposal introduces a new concept - base fee .

The base fee is the minimum price a user must pay in order to have their transaction included in a block. The base fee is set per block and can be adjusted up or down depending on the congestion level of the Ethereum network.

The next important part of EIP 1559 is to increase the network capacity , with the maximum gas limit of each block changing from 12.5M to 25M, basically doubling the block size.

By increasing the base fee and network capacity, EIP 1559 builds the following logic:

• When network usage > 50%, the base fee increases

• When network utilization is < 50%, the base fee is reduced

This means that the base fee is adjusted based on actual usage demand, ensuring that the block usage remains half full.

EIP 1559 also introduces miner tips , which are individual payments made directly to miners to incentivize them to prioritize transactions.

This is very similar to the current mechanism where miners are incentivized by increasing gas fees. This feature is really important for transactions that require fast confirmation, such as arbitrage.

Now, let’s look at a simple example comparing the EIP 1559 fee model to the existing model when the network is busy.

Let’s first look at the current fee model.

Suppose the minimum gas fee to get a transaction included in the previous block is 50 gwei. Network activity appears to remain constant, and users start submitting transactions at 50 gwei to try to get it included in the next block. At the same time, a highly anticipated new token is launched, causing users who want to buy it to significantly increase their bids. Now, the minimum fee to get a transaction included in the next block is 100 gwei. If network activity remains high for several subsequent blocks, users who submitted transactions at 50 gwei may have to wait a long time for their transactions to be confirmed.

In this case, the block limit is 12.5M gas, and the only way to package a block is to bid higher than other users.

In the same scenario, assume that the EIP 1559 solution is used.

In the last block, 50 gwei was the base fee, the network utilization was 50%, and most blocks used 12.5M gas (half of the gas limit).

The launch of a new token causes a spike in demand, requiring users to submit transactions with higher miner tips.

When block space demand is high and the miner tip required for transactions is high, the maximum upper limit of miner output blocks becomes 25M gas, which means that more transactions can be packed into one block. However, the current block is full (network utilization rate > 50%), so the basic fee of the next block will increase.

If network activity and block demand remain high, miners will continue to produce full blocks, increasing the base fee for each subsequent block. At a certain point, excessive fees will reduce user willingness to trade, and network utilization will gradually return to below 50%, and the fees for subsequent blocks will also decrease.

The base fee can increase or decrease by up to 12.5% ​​per block, so a 10x increase in gas fees would take about 20 blocks (5 minutes), and a 100x increase in gas fees would take about 40 blocks. In the example above, the base fee for the second block would be 56.25 gwei.

The above example illustrates how EIP 1559 eliminates high network fees. Another way to look at it is to assume that it somehow translates high gas fee fluctuations into block size fluctuations.

Given that the amount of increase/decrease is limited, the difference in base fees between blocks can be easily calculated.

Therefore, the wallet can automatically set the base fee based on the previous block information.

To prevent miners from colluding to artificially inflate the base fee due to self-interest, the base fee is destroyed.

It bears repeating - the base fee is completely destroyed and the miner tips belong to the miners .

Another more important new concept is FEECAP . Users can set a limit on the payment fee for a specific transaction, rather than just being able to pay the current basic fee. If FEECAP is lower than the current basic fee, the transaction must be packaged until the basic fee is lower than the maximum value set in FEECAP.

The fee changes are also backwards compatible: while legacy Ethereum transactions will not directly benefit from the new pricing model, they will still operate under the new fee system.

Influence

The EIP 1559 changes will affect many things, some of which are significant.

First, miners’ profits are reduced . In the current fee system, miners receive block rewards and all gas fees. Recently, DeFi has caused high gas prices. Historically, block rewards have always been much higher than transaction fees, but now miners are paid more in gas fees than actual block rewards.

After the implementation of EIP 1559, miners will only receive block rewards and miner tips. This is why most miners are reluctant to promote the proposal and change to ETH 2.0.

Another important impact is on wallets . If EIP 1559 is introduced, wallets no longer need to estimate gas fees. They can automatically set the base fee based on the available information in the previous block, which can simplify the wallet user interface.

Third, the destruction of the base fee is also of great significance to the Ethereum supply . This is why EIP 1559 is often discussed by ETH investors.

Burning the base fee creates an interesting cause-and-effect loop between network usage and Ethereum supply. More network activity = more ETH consumed = less ETH for miners to sell on the market, driving up the value of existing ETH.

Destroying the base fee is beneficial to Ethereum network users, as they don’t have to pay too much to miners and Ethereum becomes more scarce.

The base fee burning mechanism has also sparked discussions about deflation in Ethereum. If the block reward is lower than the base fee burned, it may cause deflation. For example, this will happen due to the recent DeFi boom that has caused gas fees to soar and network usage is very high.

However, there is a potential disadvantage of burning the base fee, which is the loss of control over Ethereum's long-term monetary policy, and Ethereum will eventually be inflationary and deflationary at times. But this does not seem to be a significant problem, as Ethereum's maximum annual inflation rate will be limited to around 0.5%-2%.

So, will EIP 1559 reduce gas fees?

In fact, this is not the case. EIP 1559 optimizes the fee model by flattening fee peaks and limiting the number of transactions with high gas fees, but reducing gas fees still mainly relies on ETH 2.0 and Layer 2 expansion solutions.

When will EIP 1559 be launched?

EIP 1559 will make major adjustments to the Ethereum fee system. This seems to be the consensus within the Ethereum community, and most people support it.

Still, there are challenges, not least ensuring miners can safely process larger blocks without leaving the entire network vulnerable to denial-of-service attacks.

EIP 1559 falls into the EIP Core category, which means the changes will affect Ethereum consensus and it requires all clients to upgrade simultaneously (hard fork).

Judging from the timeline, it seems that EIP 1559 can be implemented in the next hard fork after the Berlin hard fork in 2021.

The team working on this proposal received funding from the Ethereum Foundation and Gitcoin donations for EIP 1559. Most of the coordination work was done by Tim Beiko.

Due to different timelines, EIP 1559 can be implemented in both Ethereum 1.0 and 2.0, but if there are delays, it may only be implemented in Ethereum 2.0.