The following discussion will cover Ethereum EIP-1559 tutorials that will enable you to understand their core infrastructures.
Ethereum has been one of the frontrunners in changing the world with innovative applications of blockchain technology. It has enabled enterprises and individual users to include a wide range of applications throughout different sectors. Created in 2015, Ethereum has established a prolific platform for developing decentralized applications with improved scope for collaboration.
One of the recent topics regarding the applications of Ethereum points out to EIP 1559. What is it exactly, and how is it related to Ethereum? The following discussion provides an introductory impression of the EIP or Ethereum Improvement Proposal 1559. In addition, readers can also understand the implications of the EIP for the future of Ethereum.
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Brief History of Ethereum
Ethereum started off in 2015, and as of September 2017, the price of Ether or ETH, the native token of Ethereum, was valued at more than $290. Ethereum offers a blockchain network with a flexible programming language enabling developers to write software that could support blockchain transactions in management and automation of particular outcomes. This is where Ethereum presents notable prospects for expanding the use of smart contracts. The brief explanation of Ethereum blockchain basics gives the ideal foundation for an account of EIP 1559 explained properly.
In order to understand the meaning and significance of EIP 1559, it is important to know what EIPs are. EIPs or Ethereum Improvement Proposals are actually standards that specify promising new features or processes tailored specifically for Ethereum. EIPs feature technical specifications designed for potential changes proposed for the Ethereum blockchain.
In addition, EIPs also serve as the ‘source of truth’ for the Ethereum community. The EIP process is highly crucial for discussions on and development of network upgrades alongside Ethereum application standards. The definition of EIP can definitely provide some sort of clarity about what does EIP 1559 mean from a basic perspective.
Interestingly, any user in the Ethereum community could develop an EIP by following specific guidelines. For example, the EIP should offer a rationale for a concise technical specification of the new feature. The user writing the EIP takes on the responsibility of building consensus in the community alongside ensuring documentation of conflicting opinions.
Now, any individual would reasonably wonder about the factors that reflect on the significance of EIPs. EIPs like the EIP 1559 are capable of playing a focal role in the way changes happen and are recorded on Ethereum. Most important of all, EIPs provide an exceptional tool for facilitating proposals for changes, debating over them, and adopting them.
Why Discuss about EIP 1559?
With a basic impression of Ethereum and the role of EIPs, it is safe to proceed towards an account of EIP 1559 explained properly. Many trends in the world of blockchain take a lot to garner the attention of the public. However, it is not common for mainstream financial media outlets to be worried about particular EIPs. The introduction of the new EIP variant poses many implications for the fee market of Ethereum alongside its monetary policy.
Therefore, many Ethereum holders, miners, developers, and users are worried about various concerns regarding this new EIP. The new EIP upgrade went live for the first time on Ropsten at the location of block 10499401 in June 2021. As the new EIP is all set to become a part of the London Hard Fork in July, it is only sensible to take a deep dive into the topic.
Working of Ethereum
The fundamental understanding of EIP 1559 must have adequately conveyed its basic functionality. However, it is important to understand Ethereum’s existing transaction fee structure for a comprehensive impression of the new EIP variant. Any type of activity on Ethereum is referred to as a transaction, irrespective of its nature.
The transactions are documented on the Ethereum blockchain with the flexibility for any individual to view them. At the same time, it is also important to understand that the Ethereum blockchain is more than just a store of value. Ethereum not only serves as a foundation for developing decentralized apps but also supports other emerging application areas such as non-fungible token (NFT) and decentralized finance (DeFi).
The next crucial aspect in understanding the working of Ethereum is to know the working of gas fees. Transactions on the Ethereum blockchain require some sort of fees, and every transaction on Ethereum accounts for transaction fees. The transaction fees, also known as gas fees, are quantified in terms of “gwei.” The objective of gas fees has a significant influence on answers for what does EIP 1559 mean comprehensively.
As a matter of fact, the gas fees on Ethereum can serve diverse objectives. First of all, gas fees help in preventing concerns of network spamming by malicious agents. In addition, gas fees provide incentives to miners as rewards for their work in the maintenance of the network through validation of transactions.
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Existing Mechanism for Determining Transaction Fees
Presently, Ethereum leverages an auction system for determining transaction costs. Like any other auction system, Ethereum does not feature a specific cost margin. On the contrary, the fees for every transaction face the influence of different factors. For example, network usage could be one of the factors for determining transaction fees. As a result, miners could obtain high fees for transaction settlement in scenarios involving high traffic.
Need for a New EIP
The origins of EIP 1559 depend largely on the existing model of ‘high demand, high premium’ for determining transaction fees. In the case of physical assets, the prices of products or services escalate in the time of high demand. On the contrary, the case becomes quite complicated for Ethereum transaction fees which generally improve in an unprecedented manner. Users could express their readiness for investing a premium amount for quicker settlement of transactions. However, the general interest in faster transaction settlement could lead to a growth in prices due to competition among users on the network.
Many experts have pointed out that EIP 1559 explained properly shows how transaction fees on the Ethereum network are the primary cause. In May 2021, the transaction fees increased to almost $71. When users had to pay transaction fees less than $5 just four months earlier in January 2021, it creates a lot of concerns. The volatility in transaction fees encouraged the adoption of competitor networks, particularly for carrying out stablecoin transactions.
What Does EIP 1559 Mean?
As already evident, EIP 1559 is an Ethereum Improvement Proposal tailored for replacing the existing auction-based gas fee model of Ethereum. The new EIP focuses on replacing the auction gas fee model with a model splitting transaction fees into tips and base fees. In addition, the new EIP variant also offers a burn mechanism capable of transforming Ether into a deflationary asset.
The basic understanding of the new EIP variant points out the discrete ‘base fee’ for the transaction that you have to add in the next block. The ‘base fee’ is mandatory for every type of transaction. On the other hand, users or applications wanting faster settlement of their transactions could add a ‘tip.’ The ‘tip’ is actually a ‘priority fee’ for ensuring that the miner adds a specific transaction before others.
In the existing Ethereum transaction fee mechanism, miners receive fees from users alongside the block reward. Miners get 2 ETH per block as the block reward from the Ethereum blockchain network. In the case of EIP 1559, you can burn up the base fee while the miner receives the block reward and a tip.
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Working of EIP 1559
The understanding of the new EIP variant depends a lot on comprehension of the new elements it brings. First of all, the attention on this new EIP variant points out to base fees. The base fee is actually the market price for including transactions. Sending a transaction with a base fee implies a proven guarantee for the inclusion of the transaction in the next block.
Deeper reflection on ‘what does EIP 1559 mean’ can help you reflect on the variability of base fees. The network demand plays a crucial role in the algorithm for determining base fees. In the case of network usage above 50%, the base fee would increase, and in cases of network usage below 50%, the base fee decreases profoundly.
It is quite clear that the base fee transforms the existing auction mechanism into a more obsolete variant. The basic idea surrounding variability of base fees focuses on maintaining network usage at 50% capacity. This clearly implies that each validated block being half full in capacity. As the block capacity changes, the gas fees would experience a similar corresponding effect.
The base fee is an important highlight of EIP 1559 as it provides the guarantee for block inclusion without auctions. Interestingly, base fee also serves as a type of on-chain prediction mechanism for gas pricing. Prior to this new EIP variant, users did not have any native approach for precise evaluation and identification of gas prices on the chain. The base fee is also an exceptional instrument for ensuring that users could settle their transactions, irrespective of demand.
Fluctuating Block Gas Limits
Accounts of EIP 1559 explained properly give adequate insights into the introduction of variable block gas limits. This implies that the block gas limit increases in event of unprecedented growth in demand, albeit with constant gas prices. As a result, the blocks become bigger and enable the inclusion of additional transactions. The flexibility of block gas limits provides assurance of predictability for base fees. Increases in gas limits would imply an increase in the next base fee. EIP 1559 could respond to short-term fluctuations in demand for ensuring stability and predictability of gas fees.
Where Does the Tip Come in the New EIP?
The new EIP also considers scenarios with extreme volatility conditions. It is quite clear that the block gas limit could expand only to a specific threshold. Upon reaching the said threshold, the Ethereum network can face massive congestion. Such type of extreme market conditions calls for refined approaches to the regulation of block inclusion.
The tip introduced in EIP 1559 works for solving this problem by prioritizing transactions of users. In the event of heavy traffic on the Ethereum blockchain, transactions with the highest tip have better possibilities of passing first. Therefore, the tip plays a crucial role in ensuring the predictability of gas fees during extreme market conditions.
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Another crucial implication related to accounts of EIP 1559 explained properly showcases the troubles due to inflation issues. However, the new EIP variant could help in countering inflation by burning the base fee. As a result, Ethereum could ensure inflation of Ether for security purposes without compromising the scarcity of Ether (ETH). It is difficult to encounter inflation when the amount of base fee burned is equal to the amount of issuance. With the help of this approach, Ethereum could develop a secure and highly sustainable security infrastructure.
Base fee burning also presents some other positive outcomes. It is possible to pay the base fee in Ether, thereby reinforcing the status of Ether as currency. The EIP 1559 would verify the payment of taxes in ETH, and it is important to note that the process of burning the base fee is actually a tax.
Every single token holder on Ethereum network gets the benefits of burning gas fees. Burning the base fee improves scarcity of Ether and contributes profoundly to growth in its value. As a result, the new EIP variant poses many long-term benefits for the Ethereum community, especially with its capabilities to serve as the taxation system of Ethereum.
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On a final note, it is clearly evident that the EIP 1559 has a lot of potential for transforming Ethereum. It focuses on changing the way users pay for transactions on Ethereum blockchain. Transactions are an important element for Ethereum blockchain and require fees for their addition and validation in a network. During times of unstable demand, users have to encounter considerable fluctuations in transaction fees.
The new EIP proposed for revising the mechanisms to determine transaction fees trumps the conventional auction mechanism. Interestingly, users can get the benefits of stable and predictable gas prices with the assurance of security from inflation. Learn more about the new EIP variant and how it can affect the world of blockchain.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research!
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Author: Diego Geroni