Simple Introduction To EIP-1559: What Does the Ethereum Network Update Bring To Us
EIP-1559 went live on the Ethereum blockchain once miners hit block #12965000. Since the day of EIP-1559 activation, Ethereum works on the London hard fork that includes major changes to the fee structure and the way the network functions.
What are EIP-1559 and London hard fork?
Hard fork is the update mechanism used to mandatorily implement new features and apply hot-fixes to the network. Once a hard fork takes place all nodes are obliged to upgrade or risk becoming part of a forked defunct blockchain. If nodes decide not to use the new chain, their blocks get rejected by the main chain.
London hard fork is the large update of the Ethereum network that brings us several Ethereum Improvement Proposals (or EIPs).
The crypto community were following the EIP-1559 news and mostly ignoring 4 additional improvement proposals which London hard fork brings to the network. For example, already implemented EIP3541 and 3554 add a few new types of smart contracts and delay the “difficulty bomb”. But the most important update, of course, is EIP-1559, which completely changes the way fees work in Ethereum.
What does EIP-1559 mean for users and miners?
Most importantly: the new fee structure.
The pre-EIP mining model had two reward types for miners, which were the base block reward and the users’ fees. The old model was also being referenced as the “auction model” in which you had to pay more to put your transaction higher in the transaction list. Previously, miners could assert control of the network by choosing to ignore transactions sent without high fees. Because of it, during periods of high network congestion the miners were able to increase the fee of more complex transactions up to $100 or more.
After the update it’s likely that miners won’t be able to do that any more, since the fee structure looks completely different. Since August 5th, every transaction includes a dynamic “base fee” that’s getting burned rather than going to the miners. This fee is calculated automatically. When a block is over 50% full, the fee increases. And when the blocks are not exceeding the 50% point, the base fee progressively decreases. In 24 hours after the update, over 4,000 ETH had been burned according to the EthBurned tracker.
Network participants can still include an optional “tip” with their base fee to speed things up if desired. But since tips are not mandatory, the old “auctions” will most likely appear again only in extreme congestion cases, like we’ve seen back in April.
Long story short, the EIP-1559 update was designed to increase the stability of the fee structure, decrease the volatility of the fees and make the network more predictable in cases of high congestion. Also, lets not forget a burning mechanism which in the long term could have a massive impact on Ethereum’s tokenomics.
Ethereum as a deflationary asset
While the newly added fee structure already has an immense impact on the way that transactions work, the fee burning mechanism cannot be discounted. With most of the incoming fees being burned Ethereum might become a deflationary asset, making it even more attractive as a long-term investment.
Block rewards and transaction fees always were a source of major selling pressure for the Ethereum cryptocurrency. After the update, there will be periods when there are more ETH being burned than mined in one block. The world’s first Ethereum deflationary block has already been issued: block #12,965,263 gave miners 2 ETH with 2.078 ETH being burned. As of now, it’s not enough for Ethereum to become a deflationary asset completely. Almost every mined block should fall under the general rule: base fees in the London hardfork must be lower than the amount of ETH that’s being burned. According to on-chain researche, ETH supply will most likely start to decrease only in 2022.
EIP-1559 is a very significant update that changes the fee structure of Ethereum and adds a constant fee burning mechanism that might greatly increase the price of Ethereum, making it a deflationary asset. It could attract a new demographic of investors looking for scarcity and inflation hedges.