ViaBTC’s Insights | What Changes Will Be Brought by Ethereum’s EIP-1559 Upgrade via London Hard Fork after Being Activated on all Testnets

The London mainnet upgrade is upcoming after Ethereum London hard fork went live on Ropsten, Goerli, and Rinkeby testnets in succession. Tim Beiko, the Ethereum Foundation’s lead developer on network upgrades, has recently posted a block activation proposal on Github revealing that the mainnet upgrade is set to deploy at block 12,965,000 on August 4. He also tweeted confirmation, “Yep, unless someone objects in the next 24h, London should land on August 4th.”

The upcoming deployment of the London hard fork on the Ethereum mainnet means that the most controversial and long-anticipated EIP-1559 is set to land officially. This proposal is expected to overhaul the way users pay Ethereum’s transaction fees, whereby the network can dynamically adjust the gas fee based on the use of block space. EIP-1559 aroused controversy and misunderstanding when it was first brought forward two years ago. However, many people have updated their perspectives on the proposal as it is scheduled to set off.

Many people believe that EIP-1559 is positioned to reduce the existing high gas fee of Ethereum, which is inaccurate at all. In the event of network congestion, the introduction of EIP-1559 does not directly reduce the gas fee of Ethereum, but raises the price of block sizes in order to ease the network load. If EIP-1559 is implemented, the base fee increases at most 12.5%, after a maximum-sized block; and the base fee will be on a rise when the network remains congested. Given a seriously congested network, if the base fee of each block grows at 12.5%, about 20 blocks in less than five minutes will result in a tenfold increase in the base fee, and users also have to tip the miners to bid with others.

If the network is not congested (i.e. the blocks do not run at their designed largest capacity), the base fee decreases, which just occurs occasionally in the network of Ethereum. And, the gas fee is not too high when the network is not congested. The overriding determinant of Ethereum’s gas fee is still its network’s transaction processing capacity.

However, EIP-1559 can indirectly relieve some pressure from the gas fee. Under the original mechanism, users bid up the gas fee blindly, and the market sentiment can easily be mobilized to hike the price. Yet under the EIP-1559 mechanism, users can predict the network usage in advance and make a rational judgment on whether to participate in the bidding. For this reason, EIP-1559 offers a remedy to the market sentiment-driven blind raising of the gas fee. What’s more, the burn mechanism of the base fee also prevents miners from maliciously sending transactions to raise the gas fee.

EIP-1559 invents a burn mechanism — the base fee is burned. http://watchtheburn.com/ shows that after the launch of the London hard fork on the Ropsten testnet at block 10,499,401, 89,148.23 ETH has been burned at block 10,592,142, i.e. a base fee of approximately 0.96 ETH was burned a block. In contrast, Ethereum miners get a 2 ETH block reward. Based on what is observed from the Ropsten testnet, Ethereum will not go deflationary with the introduction of EIP-1559. However, the testnet data is for reference only, and they may differ a lot from real transactions on the mainnet.

Source: http://watchtheburn.com/

Approximately 6,500 blocks are mined per day on the Ethereum network, which would therefore result in an additional supply of 13,000 ETH per day. And according to Ethereum’s past network data, most of the instances with the gas fee exceeding 13,000 ETH a day were seen after the massive explosion of the Defi ecosystem on Ethereum last year. In this sense, to make the base fee burned to exceed the output of Ethereum, the network must be extremely congested. However, subject to the existing block size and base fee control mechanism, the soaring gas fee will discourage most users in a short term. Therefore, Ethereum is unlikely to be in a long-lasting state of extreme congestion.

Overall, after the EIP-1559 upgrade, the total volume of Ethereum will occasionally deflate in extreme congestion. From a long-term perspective, the release of EIP-1559 will slow down the original inflation of Ethereum to a certain extent, but we must wait for a test in the real environment after the activation of the London upgrade on the mainnet to see whether it will go deflationary.

Since miners have a final say on the priority in transaction packaging, the Miner-Extractable Value (MEV) problem has surfaced to affect users’ trading experience. In EIP-1559, miners will not be able to collect all mining rewards due to the burning of the base fees. So some people argue that miners who cannot receive high benefits will no longer work with traders to get more MEV revenue.

However, as it stands now, Flashbots is widely used by traders to encapsulate and package their transactions in order to prevent them from being snapped up, while miners charge an additional packaging fee via Flashbots. Otherwise, if traders send transactions directly on Ethereum, miners can copy and snatch the transactions to get the MEV.

And, even if Ethereum is moving to the proof-of-stake (PoS) consensus mechanism (Ethereum 2.0), the MEV problem will still exist as long as the persons responsible for packaging transactions know how to sequence transactions. For this reason, EIP-1559 could hardly serve as a solution. The MEV problem can be partly addressed via Flashbots for the time being, and rooted out through targeted upgrades to the Ethereum network in the days to come.

The biggest controversy of EIP-1559 comes from miners. After this upgrade, the base fee will be directly burned, thus reducing miners’ income. So many miners have expressed their opposition to EIP-1559 and requested a removal of the proposal from the London upgrade. However, the activation of EIP-1559 seems irreversible.

If disagreements among the miners result in an attack on the Ethereum network and cause the network to fork, it will be difficult for the forked Ethereum network to obtain the same level of support as the Ethernet network maintained by the Ethereum community. In this case, the new cryptocurrency mined by miners can hardly match the value of Ether, and this also impairs the security of Ethereum itself. For miners who have already purchased Ethereum mining rigs, this is not a cost-effective option.

On the contrary, the support from miners for Ethereum helps maintain the security of the network and is more conducive to the development of the Ethereum ecosystem by engaging more developers and users. At the same time, miners can get additional MEV from more DeFi projects to increase their earnings.

EIP-1559 comes as a boon for Ethereum users as they no longer need to worry about the gas fee settings but just see if the current base fee falls within their budget. Besides, after the fee cap is set, the margin between the actual consumption and the fee cap will be refunded, eliminating unnecessary waste. That has indeed greatly improved users’ trading experience.

Ethereum becomes more developer-friendly as it more or less lowers the application threshold and avoids the loss of users due to poor experience. Among the many public chains today, Ethereum remains the most widely used and best-known and has thus become the top choice for developers. The improved user experience brought about by the Ethereum upgrade will also boost the confidence of DApp developers and retain those promising.

The London upgrade is one of the most important upgrades before the Ethereum network moves to ETH 2.0. After several delays, all the testnet upgrades with stress tests have been completed. The only thing we can do now is to wait for the mainnet upgrade. The market is optimistic about the London upgrade. Despite the controversies arising from EIP1559, there is no doubt that it can facilitate the stable development of the Ethereum ecosystem from many aspects. Like many types of applications such as DeFi applications and NFT applications have grown fully-fledged on Ethereum, only a better Ethereum ecosystem can secure miners, developers, and users more space for profits.

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