EIP-1559, or Ethereum Improvement Proposal, is the latest proposal added to the Ethereum Blockchain a few months ago. It was introduced to make more efficient Ethereum transactions. The system combines a hybrid combination of base fees and tips.
Initially, miners were discontent about making less money due to the EIP-1559 upgrade, and it has not shown any sign of discontentment. It is expected that EIP-1559 will be an improvement in the transaction fees estimation. It is also likely to reduce the inflation rate of Ethereum from 4% to 3%. So far, there is a lot of hope for EIP-1559 in improving the situation for the 2nd largest cryptocurrency.
What Is EIP-1559?
The reason EIP-1559 was introduced in August last year is to improve the situation for the Ethereum fee market. It is primarily a proposal that makes two critical changes to the market:
- The current standard of ETH transfer is called a gas limit, with the current limit being 21,000 gas units. In this proposal, that gets replaced by two values. One is a “long-term average target” at par with the current gas limit. And the 2nd is a “hard per-block cap,” which is twice the current limit.
- The average usage of the block gas should be at per with the current gas limit. The Base Fee of transactions needs to be adjusted for this.
This is a great way to set a target goal as gas prices have gone up and down randomly in the previous months. This gets the users deviated from the actual purposes of Ethereum, like NFT minting, using DeFi apps (decentralized finance apps), and money transfer.
The EIP-1559 came into action only a few months ago. But it was initially being proposed almost years back. Its inventor Vitalik Buterin came up with the proposal to change the fundamentals of the current transaction method.
The change that EIP-1559 aims to bring will simplify the transaction process on the network. And the gas prices may even decrease slightly, too, encouraging more investors to join the Ethereum network.
Mission of EIP-1559
EIP-1559 has been introduced to the Ethereum network with the primary goal of:
- The primary goal is to let an automated bidding system handle the transactions. At the moment, one needs to bid their target pay to the miner before the trade. This makes the process very expensive. However, with the current EIP-1559 proposal under progress, the system can set a free amount for users, alternating based on network congestion.
- The other significant change would be the decrease in the ether supply. The idea is to burn a part of each transfer that will increase the price of Ether.
According to the chief strategy officer of CoinShares, a digital asset management firm, “EIP-1559 is one of the most significant upgrades to Ethereum since the network’s launch.”
The Current Problems of the Market
The current gap between an average gas price and the 10th percentile is thrice for median and 5-8 times for mean. If you are wondering about the inefficiency of the current free market, then know that refusing to overpay can cost you a delay of 1-2 times.
The transaction fee markets currently face three problems:
- There is no match between the cost of transactions and the volatility of the fee levels.
- The current system needs the users to make the first-price auction, giving miners a choice to pick the highest-paying one.
- The rewards are entirely through the transaction fees, which leads to more instability.
Benefits of EIP-1559
There are few benefits of EIP-1559:
- It can reduce the risk for the investors due to the fee volatility and social cost mismatch.
- The auctions can now be done at a fixed price. This gets rid of the first-price auction, making fee estimation less expensive and simpler.
- There are now permanent block rewards. This also reduces the fear of instability with fee-only blockchains.
What Does This Mean for the Investors?
Ethereum is a cryptocurrency known for making fun transactions like NFTs or DeFi. Users get to create, publish and even monetize your apps on the platform. But the payments are in Ether cryptocurrency.
Ether can be used for all types of applications, from gaming and advertising to finances. Usually, the app developers pay a hefty fee to the network for making new decentralized apps or tokens on the network. As the number of apps increases, so do the price or gas fees. This, in turn, increases the price of Ether.
However, market volatility, which is standard for cryptocurrencies, seemed to drop a lot. This is where EIP-1559 comes into the picture. It has been estimated that this proposal will reduce the supply and make Ether deflationary in the long term.
As a result, people investing in Ether can benefit significantly from it in the future. Moreover, it may encourage more people to invest in the crypto industry too.
What Does This Mean for the Miners?
A lot of people may argue that the EIP-1559 will put the risk of over-stressing on the miners. But the proposal is meant to increase the block size by 2x at most. Each block with a gas price twice that of the TARGET will increase the BASE FEE 1.125 times.
At present, a double load hardly lasts more than 5 minutes. And that also happens by a random chance in 10 days. Therefore, introducing EIP-1559 will not put any more load than there already is on the system.
With the EIP-1559 in action, a part of the transaction fee will get burnt from now on. This will increase the efficiency of the block sizes on the Ethereum network. Even though it will be a minor blow for the miners, ETH stakeholders will benefit from it.
The most significant impact would be on the gas price, which will be less volatile now. Thanks to the introduction of EIP-1559, ETH seems to have regained its importance finally. With EIP-1559 heating up the network, more exciting things are expected in the future.