What is EIP 1559 and How it will Lower Ethereum Gas Fees and Make ETH More Scarce?

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What is EIP 1559 and How it will Lower Ethereum Gas Fees and Make ETH More Scarce?

Key highlights:

  • EIP-1559 is an Ethereum Improvement Proposal that seeks to improve Ethereum's transaction fee model
  • Under EIP-1559, a base transaction fee would be introduced
  • The base transaction fee would be burned
  • On top of the base transaction fee, users would include "tips" to miners

EIP 1559 is an Ethereum Improvement Proposal that was put forward by Vitalik Buterin in 2019. If it becomes successfully implemented, it is expected that it should help to lower Ethereum GAS fees, reduce congestion, and make ETH more scarce.

It will affect the Ethereum monetary policy by including fee burn proposals to lower ETH GAS fees and remove ETH from the market.

It should also improve user experience as it will give more control to users in how much they spend on fees and reduce the likelihood of fee-related accidents. For example, a Reddit user recently made a post explaining how he ended up paying $9,500 in fees for a $120 Uniswap transaction.

Apparently, his Metamask wallet did not populate the “Gas Limit” field with the correct amount so he decided to change it manually. However, he made an error by typing 2000000 in the “Gas Price” input field instead of the “Gas Limit” field - meaning the transaction fee was 2000000 GAS - around 23.5172 ETH!

The entire idea of EIP 1559 is to smooth out spikes in network fees as well as making it easier for wallets to be able to calculate the fees more easily and prevent the situation that happened to this Reddit user from happening again.

In the current fee model for Ethereum, users have to bid for space in a block through the gas fees in what is known as a “first-price auction”. If the network is congested, the fees will spike higher which will cause users to input higher fees. This usually leads to users overpaying for transactions unnecessarily just to get them included in the next block quicker.

How Will EIP 1559 Lower Fees?

There are four main goals that EIP 1559 is trying to achieve:

  • Make transact fee more predictable for users
  • Reduce delays in transaction confirmations
  • Improve user experience by automating fee bidding system
  • Create a positive feedback loop between network activity and ETH supply

EIP 1559 will introduce what is known as a “Base Fee” to each transaction conducted on the network. This will be a minimum fee to be paid to send a transaction and it will increase or decrease depending on how full the blocks are.

The base fee is set per block and will change after each block depending on the network congestion. If the network usage is high, the base fee will increase for the next block causing transactions to become slightly more expensive. When the network usage is reduced, the base fee will be lowered again.

EIP 1559 is also designed to provide an increase in the network capacity by changing the max gas limit per block. Currently, the max gas is set at 10 million GAS. With EIP 1559 implemented, this will increase to 20 million GAS.

With these two changes, the network will aim to achieve equilibrium at 50% capacity. When the network is at more than 50% utilization, it will increase the fee for users. If the capacity is beneath the 50% threshold, then the fees will be lowered. This all depends on how much GAS is going into each block.

Additionally, EIP 1559 will also introduce a miners tip. This is similar to the current model in which the highest fees are picked up by the miners first. However, in this scenario, the miners will pick up the transactions with the highest “tips” first.

Why Will EIP 1559 Improve Ethereum?

First of all, it will make the user experience for sending transactions much more fluid. For example, wallets such as Metamask will easily be able to calculate and set their base fee depending on the information from the previous block.

On top of this, EIP 1559 is also expected to make Ethereum more scarce. This is because the newly introduced base fee will always be entirely burned. This is quite interesting because the miners will not receive this fee, but it should help miners overall in the sense that it will make ETH more scarce.

When the Base Fee is burned, this is removing ETH from the circulating supply which makes it slightly more valuable and should help to raise the price. Under heavy loads of activity, there will be more ETH burned due to the Base Fee being higher and making it more scarce. This is the positive feedback loop between network activity and the price of ETH that EIP 1559 is trying to achieve.

However, it is important to note that not everybody is happy with this proposal and it might see some resistance from the miners themselves. This is because they are happy earning from the current model which pays them the entire transaction fee. On top of this, they also still receive the block subsidy (Block Reward) for producing the blocks. In fact, Ethereum miners have actually started earning more through transaction fees than block rewards in recent months due to the DeFi summer increasing transactions on the network.

Yaz is a cryptocurrency technical analyst with over seven years of technical analysis trading experience. As an Economics graduate, he has taken a keen interest in the future potential of blockchain in the financial industry. Removing crypto from the equation, Yaz loves to watch his favorite football team and keep up-to-date with the latest fights within the UFC.

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