What is EIP 1559?

Today we review what it is and what EIP-1559 consists of. Read on to find out what it is, how it works, why it was created, and all the features you should know about EIP-1559.

UOne of the most recent and controversial improvements of Ethereum, is the well-known EIP-1559, known as "Fee market change for ETH 1.0 chain" or "Changes in the commission market for ETH 1.0", which was presented by Vitalik Buterin , Eric Conner, Rick Dudley, Matthew Slipper, Ian Norden and Abdelhamid Bakhta with a very clear objective: to change the way commissions are handled within Ethereum.

But how does the EIP-1559 really work? Did it really have the expected impact? How did the community receive this improvement? This and more, we will see below.

Why was EIP-1559 created?

In Ethereum the commission system is quite complex, especially if we compare it with Bitcoin. The reason for this is closely related to the EVM and the concept of Gas as a form of payment for the operations carried out in it. The most basic and easiest way to understand this is to see each smart contract as a series of instructions that can be more or less complex to execute computationally.

This means that, taken together, each smart contract has different computing needs. And, since the computational power of the EVM is limited, a small price must be established to pay for access to said resources. This payment is calculated taking into account the cost of carrying out all the operations within the executed smart contract. A cost that is measured in Gas and said Gas must be paid using the system currency: ETH (or its wei fractions).

Knowing that each contract has a cost and that this cost is variable, Ethereum created its first commission market. One that works excellently except for one point: the low scalability of Ethereum and its high demand trigger the price.

Look at it this way: if you want to buy a loaf of bread, and it turns out to be the only loaf of bread in a world of 300 million people, the cost of it will be immense because the demand vastly exceeds the supply. The same goes for Ethereum. The demand for services in Ethereum (DeFi, GameFi, Metaverses, among others) is so high and the computational resources are so limited, that the price to access them is increasingly higher. In the end, it is not that "Ethereum has very high commissions", it is that the demand on the network triggers the price, because other people are willing to pay more for said resources.

Said like this, it does not seem to be a serious problem. In other words, the system works well, but in reality it poses a huge problem: Ethereum depends on its services being accessible, because if they are not, the ecosystem will fall due to migration to other platforms that offer better conditions. It is there, where Vitalik Buterin comes into action and decides that it is time to change the rules of the game and at the same time cheat in the valuation of Ethereum.

How does the EIP-1559 work?

We mentioned earlier that Ethereum operations are measured by their computational complexity (higher or lower) and that such complexity has a cost in Gas (more complex, more value in Gas, and less complex, lower value in Gas). Thus, in the end, all the complexity of the smart contract (from a simple ETH transaction to managing liquidity in Uniswap) adds up all the Gas of its “computational complexity” and allows you to obtain a final Gas value that you must pay in ETH (or its fractions). ).

Well, with the EIP-1559 this changes quite significantly. The computational complexity addition system is maintained, but a kind of "dynamic tax rate" is created within the network known as «Base Fee». The Base Fee is the minimum base fee that must be paid for the transaction to be included in the next blocks, a fee that must be paid yes or yes within the network. In addition to the Base Fee, the user can specify an additional commission as a "Type" known as "Priority Fee", which is the one that the miner will take as his profit within the coinbase of the block that will generate and validate the transaction.

The change in the system is that the Base Fee has a clear purpose: avoid applying the auction system that was initially used to calculate the price of Gas. Thus, Gas maintains a price related to the Base Fee. This following a mathematical proportion defined by the EIP-1559. Said proportion takes into account the state of occupation of the network and the user's requirement regarding the speed of confirmation.

Thus, the base fee is calculated using a formula that compares the size of the previous block (the amount of gas used for all transactions) with the target size. The base fee will increase by a maximum of 12,5% ​​per block if the target block size is exceeded. This exponential growth makes it economically unfeasible for block sizes to remain high indefinitely.

For example, if the user wants the next block to confirm its operation in the middle of a busy network, the user will have to pay a much higher base fee (12,5% ​​more expensive for each new block that has to be issued within the network). ), than if the network were at medium or low occupied capacity (where the base fee would have an additional cost less than or equal to 0%). This predictability of the base fee and its weight on the price of Gas, which has the positive effect of "lowering commissions in Ethereum", although this is not its real purpose.

This makes one point clear: if a user wants their transaction to be processed, they must pay the base fee. Being this, a dynamic data dictated by the evolution of the network. The additional payment "tip" is offered by the user in order to encourage quick mining of his operation and is the one that the miner keeps when processing it.

Thus we can see that the EIP-1559 performs the following functions:

1. Eliminates the auction system for the price of Gas. Instead, it is decided by a dynamic formulation. One that takes into account the state of network occupation and the speed with which you want to verify the operation.
2. Perform an ETH burn in order to curb the rising inflation within ETH.
3. Indirectly, it helps curb increases in the cost of transactions within Ethereum.

The impact of EIP-1559

Since the announcement of EIP-1559, it has generated a lot of expectations and discussions in the Ethereum community. On the one hand, many applauded the fact that action will be taken to try to reduce the price of network commissions. During 2020 and 2021, fees on Ethereum became especially expensive. Not only in fiat terms, but also in terms of tokens. This was due to the fact that more ETH had to be paid to complete the same operation. This was easy to check for all those who operated on platforms such as Uniswap or Compound.

On the other hand, there are those who indicate that this measure was just another example of the centralization of Ethereum. The reason is that Vitalik Buterin pretty much decided this on his own, although several others contributed to the design of the EIP-1559. In this group, many argue that the change was not only aimed at "improving conditions for the community" but especially for those who had great interests in maintaining the system with the arrival of ETH 2.0 (where EIP-1559 would still be active). This would not be the first time that Ethereum has been accused of centralization. In fact, cases like The DAO and ConsenSys are a constant in that lawsuit against the project.

Finally, those who caused the most stir were the miners. The Base Fee system affects your earnings considerably. This is because a good part of the commissions are burned. In addition, the calculation of the Gas price by Base Fee (instead of an auction) and the inclusion of the "Priority Fee" were measures that a large part of the ETH miners did not welcome. The situation at this point was especially tense. It got to the point where Ethermine, one of the largest Ethereum mining pools, directly opposed this. In fact, a boycott of the network was called with a 51% attack. Fortunately, the call did not prosper. However, there was a significant migration of computing power to other networks such as Ethereum Classic and Ravencoin in those days.

Now, outside of the whole revolution within the community, the impact is minimal. While average fees have stabilized, Ethereum's spikes and limited scalability mean fees continue to rise. For example, an ETH trade in May 2021 had an average maximum cost of about $70. But in May 2022, that cost skyrocketed to $200. It is clear that the impact of EIP-1559 in terms of lower fees is minimal, something that even Vitalik Buterin himself accepts.