EIP-1559 has been presented as a new feature in the second-largest cryptocurrency – Ethereum. According to the experts, it has the potential to give a better structure to the future of Ethereum.
But, the arrival of the EIP-1559 has given birth to many questions in people’s minds. And here we will take care of that. If you are scratching your head while looking at Ethereum’s new feature, stick to the end of this article. Here we will explain everything about it.
Introduction to EIP-1559
EIP-1559, Ethereum Improvement Proposal, also known as London Hard Fork Update, is a feature built to enhance the fee system of Ethereum.
In the traditional fee method, known as the legacy system, transaction fees used to take place in an auction-type manner which proved inefficient for many people—keeping that in mind, Vitalik Buterin, the founder of Ethereum, and Eric Conner, the co-founder of EthHub and some other developers, decided to propose the idea of EIP-1559 in 2019.
From 2019, Etehreum’s developers will begin testing this feature. After around two years of testing, they finally decided to implement it in the system. Now, everything is automated, which has immensely improved the user experience–thanks to EIP-1559.
Why EIP-1559? What’s The Exact Point Of It?
There were many problems in the legacy system. For example, an excessive amount of fees was charged from users. Ethereum developers spotted these problems and brought EIP-1599 as a solution.
Many people believed that Miner’s revenue would decrease after implementing EIP-1599. But that’s not true. EIP-1559 didn’t have a huge impact on the miner’s revenue. In fact, an increase was seen in it. According to the data declared by Coin Metrics, the daily revenue of miners has increased by 7% after EIP-1559.
According to the Ethereum Gas Station Blog, EIP-1559 consists of three main features: Base Fee, Tip, and Fee Cap.
The base fee is basically an amount that needs to be filled by the transactor so that the transaction can take place.
If the user has submitted a higher Base Fee along with a tip, the chances are high that the miner will pass the transaction to the next block.
“How much base fee is charged?” you may ask. Well, it depends on how congested the network is because the price of the base fee differs according to that.
In the old transaction system, the gas fee used to be transferred to the miners, which increased the supply of Ethereum. But, now, in EIP-1559, the base fee is not transferred to the miners and gets burnt away. The main motive behind it is to decrease the circulating supply, which can result in a higher value of Ethereum.
According to experts, this expectation might not be relevant in the short term but can be seen as a reality in the long term.
However, apart from all of these things, the best thing is now users don’t have to go for any auction and pay overly priced transaction fees because it is predetermined now.
The tip is the amount that should be transferred to the miners by the transaction sender. It is like compensation to the miner that helps avoid the risks, like uncle risks. It is a risk in which chances are less that transaction will be added to the block’s main chain as it can slow down the process.
You can also consider a tip as a premium that indicates the miner to promptly process your transaction.
However, when Ethereum is congested, it becomes necessary to get back to the action-based transaction system or legacy system. It helps to complete the transaction in a faster manner.
A fee cap is a term used for the maximum fees a transaction sender is willing to pay. This is the final stage to determine the fees of the transactor.
The transaction gets confirmation, an amount (fee cap decreased from base fee and tip) has been sent to the transaction sender, known as a refund.
Remember that the Base fee is fixed by the Ethereum blockchain system. On the other hand, tip and fee cap are determined by the user. It is worthwhile than auction-style as it doesn’t cause users to pay unnecessary amounts over the transaction.
What Are The Benefits Of EIP-1559?
- One of the best benefits EIP-1559 brings along with it is – enhanced user experience.
- It won’t only improve the user experience; it will also reduce the unnecessary amount charged from the users.
- As we mentioned before, EIP-1559 will burn some part of the fee, which will reduce the inflation in Ethereum. This can be one of the reasons for the higher value of Ethereum.
- EIP-1559 will make the Ethereum system more secure. It can be considered a long-term step to deal with denial service of attacks. EIP-1559 contains the characteristic that makes it expensive to attack the system.
- After implementing the EIP-1559, a surge has been seen in the miners’ revenue.
EIP-1559 has so many tremendous benefits that Vitalik Buterin and other developers have fully supported.
EIP 1559 is exactly what the world needs right now. https://t.co/7K3AmTF5SO
— vitalik.eth (@VitalikButerin) October 20, 2020
What Are The Disadvantages Of EIP-1559?
Everything has good and bad sides; the same applies to EIP-1559. Here are some of the disadvantages of EIP-1559.
- It can create some unexpected errors for users.
- It has been considered to bring security to Ethereum, but that’s not always necessary. There are chances that changes in codes can bring potential dangers for the network.
- It may increase the size of a block by almost 2x, which will be considered a full block, meaning a block whose gas has reached 2x of the target. It can increase the Base Fee by 1.125%. So, if a series of full blocks goes on, there can be huge increases in the fees.
Can EIP-1559 Be The Reason For Ethereum’s Growth?
Definitely, Yes – if we see from the expert’s point of view.
See, the main motive of bringing EIP-1559 is to improve the system, give users a tremendous experience, and reduce the ether supply. All of these things can impact Ethereum’s growth positively.
Especially the decreased supply, which is expected to make the Ethereum deflationary. Conner, the co-founder of EthHub, confessed that the deflationary system could be incredibly beneficial to investors who have an eye on Ethereum.
However, Ethereum is one of the largest cryptocurrencies in the world. It really has a lot of potential because its developers willingly put in their energy to implement new technologies and lead it to a better future.
A very fresh example is Ethereum’s inclination towards POS (proof-of-stake). According to CNBC Make It, Ethereum has a full-proof plan to adopt the POS model in the coming years, 2022. In simple words, Proof-of-stake allows their users to become the validators in the system by staking their Ethereum.
POS has many benefits, such as it makes the system more decentralized and secures the sharding. It has also been said that POS may increase Ethereum’s price.
If we see the big picture, investing in cryptocurrencies like Etherum can benefit. They are constantly improving and bringing the technologies to make our lives easier. The chances are that many people will understand the potential of Ethereum and will support it fully.
Cryptocurrency trading can give a good return. But, just make sure to do your in-depth research.
The Miss Beliefs Regarding EIP-1559
- Many people believe that EIP-1559 is solely for eliminating unnecessary fees. In reality, it is also introduced to make the fees predictable and reduce volatility.
- It has also been said that EIP-1559 can cause miners to face loss in their incomes. But that’s not seen when it arrived. The income was increased with time.
- Another myth that has been circulated is regarding the interaction of EIP-1559 with Miner Extractable Value (MEV). As per the sources, there’s no way that the interaction between both can take place. However, there might still be some new functions for miners that may occur.
EIP-1559 is a big revolution for Ethereum. Its main is to replace the auction-type fees system as it was creating many problems for the users. EIP-1559 was selected as the most effective solution to these problems.
After testing for approximately 1-2 years, the Ethereum developers decided to bring it into the system. It was supported by the many big faces like Vitalik Buterin and Eric Conner.
EIP-1559 has many benefits and a few disadvantages too. It has given hope to the people that it may play a key role in the betterment of Ethereum.
In Particular, the burning of the base fee to reduce inflation is one of the most useful things that may increase Ethereum’s price, according to experts. Eric Conner says that this can be very beneficial for investors in the long term.