Will EIP 1559 bring Ethereum fork candy? Why miners finally choose to support it

Source: Babbitt

By Hasu and Georgios Konstantopoulos

Original title: "Will EIP 1559 bring Ethereum fork candy? Why miners will eventually choose to support it"

Compiled by: Satuoxi

Note: The EIP-1559 proposal has caused huge differences of opinion in the Ethereum community, and the opposition mainly comes from the miner community. In this regard, cryptocurrency researchers Hasu and Georgios Konstantopoulos analyzed five paths that miners can choose. They believe that all attempts to oppose the EIP-1559 proposal (including various fork methods) will have an adverse impact on miners, so the best strategy for miners is to support the deployment of EIP-1559. The opinions of the article only represent the original author.

EIP-1559 is one of the most anticipated Ethereum upgrades ever, and it fundamentally changes the way users bid for transactions, among other benefits.

The EIP-1559 proposal has received overwhelming support in the community and is technically ready to be included in Ethereum after the Berlin hard fork. It is currently awaiting the evaluation process of core developers . Recently, miners have begun to oppose this proposal, which is not surprising because the mechanism will burn part of the transaction fees previously obtained by miners.

Although it may seem counterintuitive, our hypothesis is that the best strategy for miners is to support the deployment of EIP-1559.

We test this hypothesis by studying the two most effective ways for miners to protest this proposal: (1) forking Ethereum to create an altcoin without EIP-1559 and (2) blocking EIP-1559 on Ethereum by setting the basefee to zero.

After considering the feasibility and opportunity costs of these options, we found that any form of radical protest would be more damaging to miners' long-term income than cooperating with users.

Miners are structurally bullish on ETH and the Ethereum economy

EIP-1559 will affect miners’ income, which currently includes three sources:

• A block subsidy of 2 ETH per block, plus additional rewards for uncle blocks;

  
  

• Fees paid by users to bid for block space for their transactions (regardless of their final placement in the block);

  
  

• The difficult to quantify but extremely valuable Miner Extractable Value (MEV) is currently "outsourced" by most miners to front-running and arbitrage bots, which bid against each other in the mppool for these revenue opportunities (note: it also leads to higher network fees, thereby increasing miner income).

  
  

After EIP-1559 is enabled, miners will continue to receive the same income from block subsidies and MEV. As long as the system is not congested (demand is below the maximum gas limit), the inclusion fee will be burned. When demand exceeds the maximum gas limit, the two parties to the transaction will conduct additional first-price auctions, and the final auction fees will go to the miners.

In order to earn these rewards, miners must invest in mining hardware, power purchase agreements, and other capital expenditures. These investments make them structurally bullish on ETH and the Ethereum economy because they must mine to earn the rewards.

While we do not deny that EIP-1559 has the potential to reduce one of these three sources of revenue, miners will still have enough sources of revenue in the future to protect Ethereum and its users. Even if all basefees are burned, MEV and block subsidies will still be important sources of income for miners. Finally, the deployment of this upgrade may also mark a turning point in Ethereum user demand, ultimately promoting the growth of the overall Ethereum economy.

Users are the Ethereum economy

To understand Ethereum’s dynamics, it’s important to understand that all three revenue streams come from users and the applications and businesses that serve them.

Users create demand for ETH, which miners then sell in exchange for fiat currency and other tokens in the Ethereum ecosystem. Users' demand for transfers, transactions, lending, etc. generates congestion fees. Finally, their use of DeFi applications, such as decentralized exchanges ( DEX ), creates MEV and other opportunities for miners in the form of price arbitrage.

Users are the economy of Ethereum, and miners provide them with a service in the form of network security . This is a business relationship — miners provide this service not out of the goodness of their hearts, but in response to the economic incentives created for them by users.

Users have no moral (or other) obligation to pay miners more than is necessary to secure Ethereum, and of course, miners have no moral (or other) obligation to continue mining if it is unprofitable.

Ultimately, the power dynamic between users and miners can be explained by fungibility. It is highly unlikely that miners will replace current Ethereum users as their primary source of income, but it is very likely that users will replace some, or even most, of the current Ethereum miners.

After establishing this basic relationship between miners and users, we will apply this framework to various scenarios of EIP-1559 activation.

Scenario 1: Miners maintain an old chain without EIP-1559

We mention this only for completeness, as in many other blockchains, upgrading faces an inherent uphill battle. This is because it is often cheaper for users to do nothing and remain on the existing blockchain, and therefore it will be easier to block new proposals from passing.

This is not possible in the case of Ethereum due to the difficulty bomb. In short, without a hard fork to reset the difficulty bomb, the mining difficulty will increase until the Ethereum network itself grinds to a halt. This makes staying on the old chain impossible, and any EIP-1559 counterparty will have to hard fork with the same cost to at least remove the difficulty bomb.

Scenario 2: Miners create an altcoin and replicate the state of Ethereum

A more feasible suggestion is that miners simply fork Ethereum and create their own altcoin (similar to ETC , or BCH which forked from Bitcoin). Whether a fork makes sense depends on the opportunity cost of doing so.   In the case of EIP-1559, miners must decide between mining the new competing chain and the existing Ethereum chain.

This opportunity cost is no joke, because as we mentioned before, in order to pay any revenue to miners, the blockchain first needs to create value for users in order to earn valuable block subsidies, congestion fees, and MEV. Bitcoin and Ethereum have been forked dozens (if not hundreds) of times, but most of them have never gained any user favor.

It's much easier to build this traction when you can also fork the state of a blockchain, which all successful forks in the past have done. In Bitcoin, the state is just a list of coin ownership. BCH forked this list to take advantage of Bitcoin's existing supply distribution and airdrop new coins to all BTC holders.

But the state of Ethereum is much more complex, including not only the issuance of ETH, but also thousands of different tokens, smart contracts , applications, etc. These things can also be copied with forks, but they are just skeletons on another chain.

For example, many large currencies on Ethereum, such as stablecoins or WBTC, are claims on a certain asset in the real world. Forks cannot truly replicate these assets, and these tokens will continue to run on the EIP-1559 Ethereum blockchain, but they will be worthless on the forked chain.

As a result, the rest of the DeFi applications on the forked chain that rely on collateral also lose their meaning, such as the collateral-backed stablecoin DAI or any form of AMM pool. In short, everything except ETH, including important off-chain infrastructure such as oracles, liquidation robots, etc., will explode and cause huge chaos on the forked chain.

While ETC was able to fork from Ethereum in 2016, a similar event is no longer possible today. The emergence of tokenized assets and DeFi has made the state of Ethereum unforkable.   .

Scenario 3: Miner creates a new altcoin with a new state

If the state of Ethereum cannot be forked, what about altcoins that only copy the security elements of the Ethereum state (such as the distribution of ETH) and start from a completely new state?

This is much more feasible than scenario 2, as demonstrated by other “stateless” forks of Ethereum, such as Tron and the recent Binance Smart Chain (BSC). The success of the latter in particular demonstrates the great value of leveraging Ethereum’s virtual machine (EVM), existing wallet infrastructure (such as Metamask), and developer tools. In addition, while dapps will not be automatically replicated, their deployment is very simple and new assets can be issued later.

Given BSC’s rapid success, will there be market demand for a “permissionless” version that uses PoW mining instead of centralized operators? New blockchains could even raise gas limits to target users who currently can’t use Ethereum due to high gas prices.

But thinking further, this approach is also fraught with problems, and the problems revolve around supply allocation.

If the new chain decides to reset ETH's supply allocation and start from 0, it will lose its existing supply allocation. Bootstrapping a new supply allocation would require years of high inflation, which would make the asset less attractive. In contrast, BSC does not have this problem because Binance is the only block producer and does not require additional mining incentives.

However, if the new chain replicates the distribution of ETH, then a lot of the new ETH will be in the hands of potentially hostile users who may use these coins to drive down the price over the long term. This will make any block rewards for miners on the new chain worthless and show that even a "stateless" fork requires a certain amount of support from existing users.

Scenario 4: Miners join the new chain, but block EIP-1559

As we have analyzed, any attempt to create a competing coin is essentially doomed to fail. This leaves another possibility, which is currently the most discussed possibility among miners. In this case, miners will join the new blockchain along with users, but then suppress the EIP-1559 mechanism from burning any ETH by controlling the basefee to 0.

The method works as follows: The EIP-1559 controller determines the basefee for the next block by observing the size of the previous block. If the previous block exceeds the target gas limit (50% of the maximum gas limit), the basefee will increase to limit transaction demand. If it is below the target gas limit, the basefee will decrease to encourage demand.

Miners can technically control how many transactions they include, and therefore the block size, and thus the basefee. If miners only mine less than half-full blocks, the basefee will never increase above zero, and therefore no fees will be burned. However, competition between different miners makes this strategy impossible in practice.

First, suppose a mining pool with 5% of the hashrate tries to implement this strategy. It will only mine half-full blocks or smaller (even if demand far exceeds this level). Meanwhile, the other 95% of the hashrate will mine larger blocks, earning more revenue from fees, and the basefee will increase regardless. The mining pool controlling 5% of the hashrate will quickly realize that it is losing money and either give up or bleed hashrate. This shows that selfish miners want to include as many transactions as possible as long as there is competition among them.

What would happen if there was less competition? For example, imagine that 60% of miners agree to implement this strategy. The result is the same, because every time the 60% cartel miners mine a half-full block, the remaining 40% of miners will mine a full block and get all the extra income from congestion fees and MEV, so the basefee will still increase over time. Therefore, in this case, we call it an unstable alliance.

This strategy can only work if the hostile miners can find a way to eliminate the competition so that no one else can mine large blocks. With 60% of the hash power, they can do this by implementing what is called a Miner Activated Soft Fork (MASF). This MASF will stipulate that blocks that are more than half full are invalid, so 60% of the miners should ignore them. Now, 40% of the miners can still technically mine larger blocks, but 60% will refuse to continue mining on top of them, so all the transactions and block rewards allocated by the minority cartel will evaporate.

Now, you have to understand that a Miner Activated Soft Fork (MASF) is not new. Today, miners can already form such cartels, for example by limiting the gas limit to increase fees, charging higher fees from large transactions, or setting a price floor. All of these strategies may seem more profitable at first, but miners have good reasons not to try to implement them.

First, they require the cooperation of many mutually distrusting parties, which is difficult to achieve. But more importantly, MASF would be an unprecedented attack on the Ethereum network and its users. This would both destabilize the network at the consensus level and undermine user trust in Ethereum. This already threatens future mining revenue, but users can also more actively oppose this censorship. For example, we hope that users will start broadcasting their transactions directly to friendly mining pools to deduct fees and MEV from censored pools.

In summary, basefee manipulation is not a stable equilibrium for miners who do not implement MASF. But if miners do implement MASF, it will be an unprecedented self-destructive attack on Ethereum, and of course their own investments.   .

Scenario 5: Miners join the new chain and successfully implement EIP-1559

Given that the outcomes for miners in scenarios 1-4 are all bad, we believe that their main option is to simply cooperate with users.

Even if miners make less money on this new chain (not necessarily), they will still make much more than trying to create an altcoin. Any such altcoin will be worth close to zero relative to ETH, with no transaction fees generated from congestion and no MEV generated from Defi arbitrage opportunities.

Furthermore, implementing a MASF to suppress basefee would be an unprecedented, transparent attack on Ethereum and its users. We have never seen this attack in real-world situations, and for good reason. It could directly harm miners by undermining user confidence and the value of ETH, as well as the economic activity occurring in the system.

Possible concessions

In addition to the 5 scenarios discussed above, we also discussed different concessions that users might make to appease miners. The main ones are as follows:

• Increase the block subsidy of the new chain to compensate miners for the losses incurred by burning basefee;

  
  

• EIP-969: Changes Ethereum’s PoW algorithm to exclude ASIC miners from the network;

  
  

• Instead of burning the basefee, for example, distribute it to the miners of the next N blocks;

  
  

However, we reiterate that it is already in the best interest of miners to work with users to upgrade. Therefore, users do not need to meet the demands of miners or make any further concessions to them.

in conclusion

The above is our expectation of the impact of the upcoming EIP1559 conversion, and we are confident in our analysis. We look forward to discussing these arguments with the community at the upcoming EIP-1559 roundtable (February 26, 2021 14:00 UTC).

1. There are other huge costs involved in bringing a new blockchain to market.

2. We strongly recommend that you read "Ethereum is now unforkable thanks to DeFi " by Haseeb Qureshi. His article explains in great detail what would happen if someone tried to fork the state of Ethereum, and concludes that this is completely impossible today.

3. For a formal analysis of the same argument, see sections 6.2 and 7 of Tim Roughgarden’s analysis, http://timroughgarden.org/papers/eip1559.pdf

Reference Links

1. There are other huge costs involved in bringing a new blockchain to market.  

   
   

2. We highly recommend reading Ethereum is Now Unforkable Thanks to DeFi by Haseeb Qureshi.  

   
   

3. For a formal analysis of the same argument, see Sections 6.2 and 7 of Tim Roughgarden's analysis.