Supported by the community and opposed by miners, what exactly is the controversial Ethereum EIP-1559 proposal?

With the advent of the Ethereum 2.0 era, all news about the Ethereum community has become extremely sensational. Among them, the controversial E IP-1559 proposal among miners has also become the focus.

On the one hand, the Ethereum community is actively promoting it, viewing it as an important step towards the evolution of the 2.0 ecosystem; on the other hand, Ethereum miners are increasingly opposed to it because most of their mining fees are about to be destroyed.

Why is EIP-1559 so controversial and where is it going?

Next, I will take a look at this highly controversial Ethereum community proposal with everyone.

EIP-1559 (Ethereum improvement proposal) was first formally proposed by Vitalik Buterin in April 2019, with the intention of reducing transaction volatility and providing customers with a better user experience by changing the block space bidding method and increasing block capacity .

In a nutshell:

EIP-1559 is a new transaction pricing mechanism proposed by the Ethereum community that includes a fixed block transaction fee (hereinafter referred to as the Base fee) + tip. This new pricing transaction mechanism will allow the block space to automatically expand or shrink to cope with short-term transaction fluctuations .

Improve user experience

Currently, all transactions occurring on the Ethereum chain are completed through a simple bidding mechanism .

The principle is that users propose transaction requirements by setting a certain amount of handling fees, and then miners select the transaction with the highest bid and pack it into the block.

The difficulty lies in the fact that it is difficult for users to estimate the Gas fee required for block transactions. If the Gas fee is set too low, it is likely to cause the transaction to fail and waste the Gas fee.

EIP-1559 attempts to make all transactions pay the same fee as much as possible through the setting of the base fee.

In most cases, users will only decide whether to pay the fee , rather than how much to bid. This is expected to lead to lower transaction fees on the Ethereum chain due to better fee estimation.

Flexible Block Space

Since the demand for Ethereum transactions fluctuates, the demand for block space is not fixed, resulting in some packaged blocks being full while some blocks still have a lot of idle space.

The elastic block space mechanism will allow some blocks to increase in the short term to cope with short-term transaction surges , while some blocks will become smaller.

In this way, transaction delays can be reduced and a long-term average block size limit can be maintained to keep the Base fee basically constant within a range, while allowing differences between blocks.

Better security

For the Ethereum community, EIP-1559 is an important step towards the PoS mining 2.0 phase.

EIP-1559 attempts to separate transaction fees from network security. Even though the Base fee will be destroyed, it will be safer to reward miners with a more reliable perpetual block subsidy .

The logic behind this is that destroying the Base fee has a deflationary effect on the supply of ETH, providing a guarantee for the firm price of ETH.

Secondly, without causing inflation, miners are encouraged to serve the community through permanent block reward incentives and tips, rather than competing to pack blocks with the highest transaction fees for profit. The pricing mechanism is used to change the behavior of miners who are only willing to pack blocks with high transaction fees.

Finally, the setting of permanent block rewards and transaction tips provides miners with a more stable source of income, rather than relying heavily on high transaction fees from short-term DeFi projects to make short-term profits as is the case now, thus reducing the volatility of miners' income.

Preventing economic abstraction

Economic abstraction means being able to use any blockchain asset to pay for the fees of initiating any blockchain transaction as well as the transaction itself.

Prior to EIP-1559, transaction fees technically did not have to be paid in ETH.

While the network only supports fees paid in ETH, users can theoretically pay miners in any currency type .

EIP-1559 stipulates that transactions must consume a specific amount of ETH, hoping to increase the difficulty of economic abstraction.

Because when users can use any token to pay transaction fees, the reserve status and currency premium of the native token will be threatened. However, after EIP-1559, only ETH will be allowed to pay transaction fees, because it also gives ETH tokens more real economic benefits.

Base fee + Tip

The EIP-1559 protocol introduces a new transaction fee mechanism, which divides user transaction fees into two parts: base fee and tip.

The Base fee will be automatically destroyed by the protocol, while the Tip will continue to be retained as a reward to the miners.

The base fee will be adjusted up and down according to the block space size and congestion. If the network demand exceeds the block gas capacity, the base fee will increase, otherwise it will decrease.

In addition, the change of Base fee is controllable, and the adjustment space of Base fee from one block to another is predictable. The wallet will also recommend a Base fee and Tip value to the user based on the network transaction situation.

From the user's perspective, every time a transaction is submitted, the user must set two values: GAS_PREMIUM (i.e. Tip) and Fee Cap.

GAS_PREMIUM is the bid for including the transaction in a block . Usually, it must be high enough to compensate the miner for the risk of additional uncle blocks.

Fee Cap represents the maximum transaction fee that the user is willing to pay for the transaction to be included in the block. Fee Cap covers the tip and the basic transaction fee of the block.

Since the base fee fluctuates, if the transaction fee of a block exceeds the Fee Cap, the user's transaction can only wait to be packaged in the next block.

Flexible block space reduces transaction congestion

Due to the limitation of block gas limit and the surge in transaction volume, Ethereum transactions are likely to be delayed and may even need to wait for several blocks before being packaged by miners. If other high bidders continue to appear, the transaction will be shelved.

EIP-1559 will allow for an increase in block space to cope with a surge in transactions in a short period of time and package the transactions.

However, this flexible block space will not last long, because once transactions are congested, transaction fees will increase exponentially.

As shown in the figure below, if the block has been running at full capacity, the transaction fees consumed after 100 blocks will be close to US$1,000 and continue to grow exponentially.

Therefore, the typical pattern under high congestion conditions will be a series of large blocks followed by a series of very small or relatively small blocks to reduce transaction fees and keep the overall block capacity constant.

This is the elastic block space mechanism advocated by EIP-1559.

Despite all the benefits of the EIP-1559 protocol, it has caused great harm to the interests of the mining community.

The EIP-1559 agreement will destroy the Base fee that originally belonged to the miners' mining income, and no longer leave it to the miners. According to the current proportion of Ethereum transaction fees in miners' income , EIP - 1559 will greatly reduce the miners' currency-based income.

As shown in the Ethereum daily revenue chart above, a maximum of 13,555 ETH were issued on January 28 , of which 12,996 were block rewards . In addition, on January 28, the miner transaction fee reward was 7,335 .

In this way, the mining fee accounts for 36% of the total miners' income on that day (the calculation formula is 7335/(12996+7335) ) .

Recently, Bitfly, the parent company of Ethereum mining pool Ethermine, conducted a survey on Twitter on January 15 about the support level of EIP-1559, in which 61% of voters opposed the proposal, while only 21% were in favor .

Some people in the Ethereum enthusiast community have even listed the " Five Sins of Destroying the Base Fee ", interpreting the absurdity of destroying the Base fee without giving it to miners from the perspectives of philosophy, security, and fairness.

So on the whole, the miner group believes that the EIP-1559 upgrade will not bring any benefits to miners, but will exploit the transaction fee income of Ethereum miners in disguise. Once EIP-1559 is upgraded, Ethereum miners will become slaves, and they call on the Ethereum community to respect the interests of miners.

According to the EIP-1559 protocol, the base fee generated in all transactions will be automatically destroyed by the protocol. Based on this, Ethereum can no longer guarantee the unlimited issuance of ETH, because it is very likely that the amount of ETH destroyed will be more than the newly issued ETH. In fact, the amount of ETH in circulation is in a state of continuous decrease.

This situation occurs because no one , including the Ethereum community , can control the transaction volume and demand for block space in the Ethereum ecosystem, so it is impossible to determine whether more ETH is destroyed or more ETH is issued.

Therefore, it is still unknown whether ETH will eventually move towards an economic deflation model or an inflation model, and only time can tell.

EIP-1559 was proposed as early as 2019, but due to technical and controversial issues it has been shelved and progress has been slow.

However, according to EIP-1559 developer Tim Beiko, the network code has basically been deployed and has been tested in the test network. The current urgent issue is to resolve the problem of adapting to the Ethereum network DoS (denial of service risk) .

In addition, EIP-1559 faces joint opposition from multiple mining pools and miners, and the launch date of EIP-1559 remains a mystery.

Although EIP-1559 changes the transaction fee pricing mechanism and can temporarily alleviate the Ethereum ecosystem's Gas fee dilemma, reduce transaction fees, reduce network congestion, and solidify the value of ETH tokens , it does not seem to fundamentally solve the Gas fee problem.

This is because simply changing the customization mechanism cannot reduce the average transaction fee of the entire Ethereum ecosystem. The root cause is that the network scalability of the Ethereum ecosystem does not provide sufficient network demand supply.

During a period when transaction demand on the Ethereum network remains relatively stable, no matter what mechanism is used, it cannot be expected that actual transaction fees will be significantly lower than the market settlement price.

Vitalik Buterin also holds the same opinion, believing that EIP-1559 is only a temporary solution to the high gas fee problem, and the ultimate solution to the problem still depends on improving the scalability of the network in the Ethereum 2.0 phase.

Therefore, it is still unknown to what extent EIP-1559 can reduce the probability of network congestion and reduce transaction fees.

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