What is EIP 1559? Why is it so Important?

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The London hard fork update on 5th August 2021, brought in a momentous upgrade in the Ethereum Network by introducing EIP 1559.

EIP or Ethereum Improvement Proposal 1559 fundamentally changed how users experience Ethereum transactions, the supply of ether, and how miners are awarded for including a transaction in the block space.

What is EIP 1559

At the protocol level, EIP 1559 brought in the following changes

● Altered transactional Process
● Added predetermined base fee per block
● Increased block size limit

EIP 1559 has been introduced with the primary aim of improving the transaction fee model from the earlier used Legacy model.

In this blog, we will discuss in detail EIP 1559 and why it is considered the next revolution in the Ethereum network.

But before that let us have a brief look at the legacy model and its drawbacks to better analyze the significance of the new changes.

The predecessor of EIP 1559 – The legacy model

Ethereum’s earlier monetary policy involving the Legacy model included a first-priced based auction system, where transactors had to compete for limited block space.
It simply means that transactors had to bid for block space by setting a gas price for their transaction. Increasing the chances of one with a high gas price being included in the block.

Drawbacks of legacy models

1. Overpaying

The user might end up paying an exorbitant amount for a particular transaction. For instance, if you have already bid a high amount of gas price, there is no way of getting a refund even if the competition is low.

2. Uncertain Waiting Period

A user bidding for a lower gas price might end up experiencing a long delay in their transaction being added to the block.

Now that we have a fair idea of the legacy system let’s see how EIP 1559 addresses these gaps in the Ethereum transactional process.

How is EIP 1559 an improvement upon the Legacy system?

Unlike the bidding system with only guess estimates of gas price, EIP 1559 fixes the transaction to a certain extent mainly by limiting the fluctuations in one of its components i.e. base price.

Basically, there are 3 major components of the transaction mechanism with the EIP 1559 upgrade.

1. Base Fee

It represents the minimum fees that have to be paid by the user for its transaction to be included in a block.
This tariff is decided by the Ethereum Blockchain system and is subject to congestion in the Ethereum network. The base fee gets entirely burned up upon the completion of a transaction.

2. Miner’s Tip or Priority fee

It is basically compensation for the miners that helps in reducing the transaction risk, especially the risk of your transaction being added to the block.
This separate fee is paid to the miners to incentivize them to prioritize a transaction.

3. Fee Cap

This ceiling is set by the users to limit the amount paid for a particular transaction. Now, if the base fee is higher than the fee cap the user has to wait for the base fee to be deflated for them to continue a transaction.

So, now the total fees of an Ethereum transaction include the Base fee and Miner’s tip.

How does a Base fee make transactions more predictable?

In contrast to gas fees, the base fee has a set pattern and limits its fluctuations. Based on the usage of block space the base fee gets adjusted by ±12.5%.

To get a clearer picture of this considers the following image:

This signifies that 50% is the equilibrium limit of the block space to keep the gas price steady.

Now that we have understood what changes EIP 1559 has brought to the Ethereum protocol. Let’s go over the importance of EIP 1559 for Ethereum’s future.

Recommended for: Ethereum Security Audit

Importance of EIP 1559

1. Limits Overpaying

In the legacy model, if you set a very high gas price, you have to pay that price despite the competition for the block space. While, in the case of EIP 1559 even if you set a high fee cap and the base fee is lower, you will get a refund of the difference.

2. Reduce Price Volatility

With the coming of EIP 1559, gas price changes have become smoother and predictable due to a limit of ±12.5% fluctuation on base price in each exceeding block.
Basically, EIP 1559 has transferred the volatility from gas prices to block sizes.

3. Reduce Inflationary pressure on ether supply

An entire burning of the base price upon the completion of the transaction signifies the reduction in the rate of ether production. Thus, controlling the supply inflation in ether.
Now, this was the controversial feature of EIP 1559 specifically amongst the miners as it reduces their share of transaction fees.

But why is the base fee burned and not distributed to the miners?

The reason is quite obvious, if miners are awarded the base fees, they are incentivized to create a 100% occupancy of the blocks. This may lead to miners committing fake transactions and thus making Ethereum transactions very expensive.

So, we hope this blog brings in the required clarity about the new and revolutionizing changes brought by EIP 1559. These changes not only enhance the user experience with Ethereum network transactions but also made the price fluctuations smoother and more predictable.

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