What Exactly Is EIP-1559, and Why Are Markets Excited About It?

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Ethereum developers have proposed a solution to the network’s excessive gas costs. While the markets are ecstatic, miners are not.

In its brief six-year lifespan, the Ethereum network has grown to dominate cryptos. While Bitcoin has dominated the news because to its dramatic climbs and falls, Ethereum (ETH) has established itself as the location where people go to develop things on blockchain.

But with that power comes come a slew of new difficulties. The first and most important consideration is transaction times. While quicker than Bitcoin’s meagre 3-5 transactions per second, Ethereum’s popularity has caused its 10-15 transactions per second to struggle.

To compensate, the amount of ‘gas’ paid per transaction has soared – a charge paid to miners to include a transaction in a block. Transaction costs for sending money over the network were as high as $500 in January of this year. Ethereum became a genuine gold mine for miners.

Ethereum’s gas price. IMAGE: Ycharts.com

Mining income on Ethereum reached $2.35 billion in May and has remained stubbornly high. While this was beneficial to miners, it drove a number of smaller enterprises that need low transaction fees to look for alternative blockchains to assist cut operational expenses.

Because of Ethereum’s cost problem, a slew of competing projects, such as Solana and Near, have sprung up to offer developers and their customers minimal fees and quick transaction speeds. In response, Ethereum’s core developers have proposed a remedy, Ethereum Improvement Proposal 1559.

EIP-1559, as it is colloquially known, will help lower the cost of transferring data across Ethereum while also increasing the scarcity of Ether, thereby making ETH more rare and, potentially, more valuable. However, the adjustments are not universally welcomed.

What Is An Ethereum Improvement Proposal?

The evolution of Ethereum is primarily driven by inputs made by the community that maintains the network.

These are known as ‘Ethereum Improvement Proposals,’ and they generally entail a developer or group of developers proposing a modification to the network, which is then evaluated and argued by the core developers who administer Ethereum’s source repository on Github, a platform for storing code.

If the enhancement is adopted, it is usually combined with additional enhancements in larger network updates known as hard forks. The Berlin hard fork was the most recent hard fork, and it contained a lot of security enhancements as well as new types of transactions.

EIP-1559, which was first put forward by Vitalik Buterin and a collection of core developers in April 2019, has been added to the next hard fork of Ethereum code-named London, due to take place in July 2021.

The 1559 proposal aims to improve the efficiency of Ethereum transactions. At the moment, Ethereum employs an auction method to select which transactions get bundled into which blocks.

The more a user is prepared to spend, the more probable it is that a transaction will be included. The greater the charge, the busier the network, which means customers must account for network congestion when estimating the overall cost of transferring data across the network.

With moving to EIP-1559, that mechanism will be replaced by a charge structure that the network will price autonomously. In addition, a tip mechanism would be implemented, allowing individuals who want their transactions confirmed faster to pay a miner to do so.

There’s a belief that this move would effectively cut transaction costs by 90% and reduce the uncertainty over how much it would cost to transact on Ethereum. But there’s also another impact the proposal will have on the network.

Burning Ether

While proposal EIP-1559 is designed to help reduce transaction costs, its design has also been dubbed “Ethereum’s scarcity engine”. That’s because the base transaction fee that a user pays to transact, instead of going to a miner, is effectively sent to the network and “burnt” reducing the amount of supply.

“Ethereum’s net annual issuance will drop substantially following the Phase 1.5 ETH 1 to ETH 2 merger,” said Messari research analyst Wilson Withum.

Ethereum’s issuance rate will decline. IMAGE Messari

Markets are enthusiastic about this potential since a restriction in new Ether issuance might put pressure on supply because the quantity of fresh Eth entering circulation is limited. Similar to how Bitcoin’s halving events, which occur about every four years, decrease the quantity of new BTC entering circulation, creating price increases. However, not everyone is content.

Miners’ revolt

The improvement proposal has been met by resistance from some mining pools. Flexpool launched a marketing campaign against the EIP in early 2021, which was joined by several other pools.

Sparkpool, the largest mining pool with about 24% of the hashrate, said in a Tweet that it opposes the proposal, whereas F2Pool, which holds about 11% of the network’s hashrate is in favor of the move.

In January, Bitfly, the operator behind Ethereum’s second-largest mining pool Ethermine (which possesses about 20% of the hashrate), said in a Twitter post that it is “against adopting EIP-1559 in its current state,” arguing that “Ethereum’s future may be at risk.”

This is a bit of a problem for Ethereum: the initiative is opposed by more than half of Ethereum’s current total hashrate. It is unclear how this would affect the proposal’s implementation, but some miners have already explored alternate revenue streams, most notably miner extracted value.

This contentious method includes mining pools employing bots to examine transactions in the network’s mempool – a storehouse of forthcoming transactions to be confirmed – in search of arbitrage deals that can be copied and profited from.

Once it has copied the trade, it will increase the gas price for verifying the transaction, and even push the miners’ trade through the network first ahead of the trade currently waiting.

“After scraping the Ethereum blockchain beginning with the first block of 2020 (9193266), we’ve found a total of at least $314M worth (540k ETH) of Extracted MEV since January 1st, 2020,” research company Flashbots stated earlier this year in a Medium blog.

Some mining pools are opposed to the strategy and have even developed tools to prevent miners from employing it. One of the most important is SparkPool’s Taichi Network, which stops bots from snooping on which transactions are currently queued.

With the transition to a proof-of-stake model

While the network is still a ways off, expect a rocky summer for Ethereum and its price after EIP-1559 goes online.

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