In 2013, developer Vitalik Buterin proposed an open-source public service utilizing blockchain technology. The technology would, in Buterin’s proposal, facilitate secure smart contracts and cryptocurrency trading without third party intervention. This was how the Ethereum Blockchain began its life, launching to its mainnet in 2015, and receiving development upgrades over the years.
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EIP 1559 resolves a pending problematique in the Ethereum blockchain: the inaccuracy of gas fee estimates. With the update slated for implementation before Q3 2021, Ethereum users will now have a more fairly accurate estimate of the average gas price of a transaction based on the network’s internal averages. Before the proposal’s implementation, the circulating supply of Ether has been regarded as theoretically infinite, opening the blockchain to criticisms of being unstable and inflationary in character.
The proposal will effectively reduce the circulating supply of Ether by a process of burning or elimination each time it is used to complete transactions on the Ethereum blockchain. The rapid increase in the usage of the Ethereum and decentralized applications built on top of its core blockchain has led to bottlenecks in service and user experience, among them the various delays, inefficiencies, and gradual instability of the network. According to Eric Turner, cryptocurrency analytics firm Messari’s director of research, effectively reducing the supply of Ether will lead to a surge in its price, given how the demand for its availability will variably increase over time. “This is probably one of the biggest milestones we’ve seen recently,” Turner shared.
EIP 1559’s implementation will begin witha base fee amount that would then be adjusted through the protocol, based on network congestion levels, easing transactions in as they flow. Once the network exceeds a specified threshold for per-block gas usage, the base fee initially set will increase slightly. Conversely, when the capacity is below the threshold, it will decrease. This allows for the base fee to become predictable, given how the maximum difference in base fees on a block to block basis operates on a set constraint. With EIP 1559, users won’t have to manually adjust gas fees, with their EVM-compatible wallets producing the gas fee estimates bundled with a minimal inclusion fee for miner compensation.
EIP 1559 is a turning point in the Ethereum ecosystem. A core change in the new fee system sets the rule that miners can now only receive rewards in the form of inclusion fees. This means that the base fee will always be burned out from the protocol, and that only its native cryptocurrency, ETH, is enabled for use on any transaction within the Ethereum platform, gradually reducing the risks by implication of MEVs (miner extractable values). This also gives miners assurance that they will always be paid with the block reward and inclusion fees, giving them no reason to manipulate a single fee in order to accumulate more fees from Ethereum users. This process of internal burning will help balance out Ethereum’s inflationary character, given the rise of dApps such as decentralized finance (DeFi) protocols and the rapid creation of NFTs (non-fungible tokens) which is now experiencing a global boom.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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