4 misconceptions of EIP 1559

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By Tokenize Xchange
July 07, 2021

In the previous article in Tokenize Technology, we mentioned EIP 1559 – an upcoming upgrade of Ethereum planned to be released this month. However, you may not understand it thoroughly. In this article, we will dive deep into EIP 1559 and how it works to explain some common misconceptions about EIP 1559 upgrade. Let’s find out! 

misunderstanding of EIP 1559

What is EIP 1559 Ethereum upgrade?

Before we move on to the myths of EIP 1559, let’s take a look at this upgrade to see how it creates the changes for the Ethereum blockchain. EIP-1559, standing for “Ethereum Improvement Proposal” is an updated proposal to fix numerous current issues in fee models and improve overall user experience by using a hybrid system of base fees. EIP 1559 will come up with the following changes: 

>>>Read more: Dive deeper into Ethereum blockchain<<<

Base fee and tip

Users traditionally send a gas fee to the miner as a transaction fee that is included in a block. The miners are incentivized to accept the transaction by choosing the highest gas price, leading to users’ overpaying the transaction due to the auction mechanism.

EIP 1559 misconceptions

EIP 1559 will implement a new concept named Base fee. The Base fee represents the algorithmically determined price paid by a transaction. While the Base fee is included in a block and burnt later, tips are optional fees that users can pay directly to the minder to incentivize them to speed up the transaction. 

Gas limit

The current maximum gas per block is 12.5 million. After EIP 1559 is implemented, the maximum gas limit will be raised to 25 million, basically doubling the block size. 

The Ethereum test network Ropsten will experience an upgrade called “London” at block number 10,499,401 that is expected to be mined this week. The London hard fork upgrade includes five code changes known as EIPs. 

4 misconceptions of EIP 1559

EIP 1559 targets to reduce Ethereum transaction fees 

As mentioned above, EIP 1559’s base fee is the algorithmically determined price paid by a transaction. In another word, EIP 1559 improves the user experiences by making transaction cost more predictable and less volatile with an algorithmic model so that the fee can be automatically regulated. 

Hence, EIP 1559 is not expected to bring down Ethereum fees but make it more stable instead. Under EIP 1559 application, the transaction fee will increase or decrease based on the use of block space.  

>>>Read more: Proof of Stake<<<

Ethereum’s monetary policy will be more predictable under EIP 1559

EIP 1559 upgrade introduced a fee-burning mechanism in which the base fee after paid and put in a block will be burnt and eliminated from the total circulating supply of ETH as more transactions occur. Since the base fee will be burnt instead of being distributed to miners, there will be no financial incentive for miners to congest the network and keep the fee high. 

ETH Mean and Median fee from 2017 to 2021. Source: CoinMetrics

This seems to be good news for users since the fee burn will reduce ETH circulating supply and prevent the future inflation of ETH though it is uncertain that Ethereum will be inflated. However, EIP 1559 burning fee does NOT make ETH’s long-term monetary policy more stable. In contrast, it becomes more challenging to control the total supply. 

EIP 1559 will against Ethereum miners’ benefit and make them leave the community

Though getting good responses from users, London upgrade gets objections from a great number of miners and mining pools. It is estimated that 40% of the miner’s profit comes from the transaction fees which will be reduced due to EIP 1559.  

Moreover, the amendments to EIP 1559 upgrade have been proposed, in which the base fee will not be burnt, miners’ income from sources like block subsidies will increase, and ETH mining algorithm will be adjusted so that miners will be equal in-network reward competing. 

In spite of objections from members of the Ethereum mining pools, it will not stop the developers of EIP 1559 from implementing this upgrade this July, which raises concern if miners would repel EIP 1559 implementation by shutting down their power to weaken the network. 

However, the majority of Ethereum miners will be unlikely to leave the community and attack Ethereum since miners have to give up all rewards they’ve got, otherwise, they have to upgrade their machine and keep mining. 

EIP 1559 Upgrade might deal with the issue of MEV on Ethereum. 

MEV stands for Miner Extractable Value, a general concept regarding various strategies for frontrunning or back-running transactions to secure an arbitrage profit. Ethereum miners can take advantage of their position as an arbiter in fixed block subsidy and transaction fees. 

Myths of EIP 1559 ethereum

Moreover, numerous Ethereum mining pools have been implementing MEV software to earn this source of revenue such as Flexpool. It is estimated that daily revenue from MEVs has risen from half a million dollars from the beginning of this year to more than $6 million recently.

Under London hard fork implementation, miners will find it more challenging to earn MEV from users by transaction fee, leading to their objection to the proposal. However, instead of relying on transaction fees, miners could still extract MEV by ordering transactions which means there will be not many changes under EIP 1559 implementation. 

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