One of Ethereum’s most sought after upgrades is being discussed again as momentum for approval and implementation mounts. It could effectively change the fee market mechanism by burning a little ETH for every transaction made.
As Ethereum demand has grown over the past few months, propelled by the boom in DeFi applications and protocols, network fees have hit record highs. This has made using Ethereum for smaller transactions completely unfeasible as gas fees are often higher than the amount being sent or received.
Fees are currently calculated in an auction-like mechanism that works by having everyone submit their bid for how much they’re willing to pay to have their transaction picked up by a miner. Miners will select the highest bids, naturally, which really only benefits the whales that can afford to overpay—and who usually do.
Many modifications to this auction mechanism have been proposed. The new proposal in question would have users submit bids as usual, and then everyone pays only the lowest bid that was included in the block.
Ethereum Network Gas Woes
An Ethereum Improvement Proposal has been submitted with includes a ‘BASEFEE’ mechanism that dynamically adjusts based on the current network congestion levels.
EIP 1559 was created in April 2019 but has yet to be implemented. However, considering the surging network fees, developers are taking a second look.
This EIP has been summarized as;
A transaction pricing mechanism that includes fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.
As explained by Anthony Sassano in his Daily Gwei newsletter a couple of months ago, if the chain is more than 50% utilized then the BASEFEE increases automatically, whereas if it is under 50% utilized, the BASEFEE would decrease. One thing to note is that users would still able to jump the queue by paying a ‘tip’ on top of the BASEFEE.
Because these increments are constrained, the maximum difference in BASEFEE from block to block is predictable. This then allows wallets to auto-set the gas fees for users in more reliably.
There are four primary design goals for EIP 1559. The primary aim is for a better user experience through more predictable network fees. Secondly, a slack mechanism would allow some blocks to be larger, as long as other blocks are smaller to compensate for volatility in block space demand.
Security would be improved since transaction fees are burned, and miners are incentivized by a more reliable perpetual block subsidy. Finally, it would help to prevent economic abstraction by enforcing that transactions burn a specific amount of ETH. Sassano commented that;
The beauty of this mechanism is that all of the fees (ETH) that are paid via BASEFEE are burnt and only the ‘tip’ is paid to miners.
He added that this prevents miners from manipulating the fee while ensuring that only ETH can ever be used to pay for transaction fees on Ethereum. RealT COO, David Hoffman, made the comparison to a nation-state demanding that only their native currency be legal tender to protect its economic value.
The current fee structure has been described as ‘parasitic’ with users paying and miners taking. EIP 1559 could turn it into a more symbiotic relationship. Instead of the entire fee going to the miner, a portion would be burnt, effectively removing that ETH from the total supply.
Fee burning could theoretically offset new ETH being generated by the protocol to pay validators on ETH 2.0. This could have a profound effect on ETH issuance over time as depicted in the chart below:
Over time, Ethereum’s fundamental value would increase, as would protocol security, and dApps and the DeFi sector would inherit that security.
The Current State of EIP 1559
In his latest Daily Gwei, Sassano updated the situation regarding EIP 1559 citing a tweet from PegaSys’ Tim Beiko (@TimBeiko):
Management Consultant, DCinvestor.eth (@iamDCinvestor), originally posed the question over the weekend as to what is preventing a standalone fork being implemented to get the EIP deployed ASAP.
Beiko replied, explaining that the two Ethereum clients which currently have an implementation built for EIP-1559 are Vulcanize’s Geth fork and Besu. Both are running private testnets which are still discovering ‘implementation and spec issues.’
Once that is done, the hope is to have a more public testnet to see if once the EIP is correctly implemented across clients, it works as intended on a live network.
Beiko continued to state that he would personally like to see it on a network with a large state, such as Ropsten, to see if large blocks are an issue.
It’s not yet certain when EIP 1559 will coming to the Ethereum mainnet. Sassano stated that this particular EIP is ‘probably the largest and most complex change to Ethereum since it first went live back in 2015.’
It still needs a lot of research, development, and testing, all of which have some financial cost attached. There is a little testing being done outside of Ethereum by other projects such as Filecoin and Celo, but very little details are available on the results yet.
EIP 1559 implementers and developers meet every few weeks to discuss status updates and progress with calls uploaded to YouTube after the event. Sassano made a hopeful prediction on full integration within the next year, but as with all things Ethereum, it is a ‘big maybe,’
If I had to give an ETA on EIP-1559, I would say maybe (big maybe) within the next 6 to 12 months if we can rally the community around getting this into a standalone Ethereum network upgrade,
It appears then that users of Ethereum will just have to grin and bear the high gas fees for what could be one more year, since scaling with ETH 2.0 Phase 1 is at least that far off.
If EIP 1559 can be implemented quicker it should help to rebalance the fee structure and create a better economic environment for both users and miners alike.