EIP-1559 will help reduce the cost of moving data around Ethereum and increase the scarcity of ETH, making ETH more scarce and theoretically more valuable. But not everyone is in favor of that change.
Ethereum developers have come up with a proposal to help solve the situation gas fee high of the network. While financial market are interested in this proposal, the miners are not.
With only a short six-year history, the Ethereum network has climbed to the top of other cryptocurrencies. While Bitcoin is notable for its spectacular price moves up and down, Ethereum has cemented itself as the ideal destination to build anything on the Blockchain.
But that dominance comes with some challenges. First and foremost is the transaction time. Although faster than the meager 3-5 transactions per second of Bitcoin, but the popularity of Ethereum makes it quite difficult for the network to handle 10-15 transactions per second.
To offset those challenges, pay-per-transaction gas fees (fees sent to miners to integrate transactions into blocks) skyrocketed. In January of this year, transaction fees were at times as high as $500. For miners, Ethereum is a literal gold mine.
In May, mining revenue on Ethereum reached $2.35 billion and is still high today. While that’s good for miners, it forces some smaller projects that can only pay low transaction fees to look for alternative blockchains to help reduce operating costs.
Ethereum’s fee problem creates an opportunity for a host of competitor projects to offer developers and users low fees and fast transaction times, such as the Solana and Near projects. In response, the core developers of Ethereum launched the Ethereum Improvement Proposal 1559 (EIP – 1559) solution.
What is Ethereum Improvement Proposal?
The development of Ethereum is largely thanks to the submissions made by the community that maintains the network.
These are collectively known as “Ethereum Improvement Proposals,” which include changes typically submitted to the network by a single developer or team of developers. The proposal is then reviewed and debated by the core developer who manages Ethereum’s code repository on the Github code-storage platform.
If accepted, the improvement is often accompanied by other improvements in a broader network upgrade known as a hard fork. The most recent hard fork is Berlin and includes a number of security improvements and new transaction types.
EIP-1559 was first introduced by Vitalik Buterin and a group of core developers in April 2019. The proposal is to be added to Ethereum’s next hard fork called London, which will take place in July 2021. .
What is EIP – 1559?
Proposition 1559 is designed to make transactions on Ethereum more efficient. Currently, Ethereum has an auction system that determines which transactions are packed inside which blocks.
The more users are willing to pay, the more likely they are to be transacted by integrated miners. The busier the network, the higher the fees, which means that users must factor in network congestion when trying to estimate the total cost of moving data around the network.
By switching to EIP-1559, that system will be replaced by a fee structure that is automatically priced by the network. On top of that, a tipping system will be introduced to allow those who want faster verified transactions to pay miners.
This move will effectively cut transaction costs (90%) and limit the volatility of transaction costs on Ethereum. But the proposal also had another impact online.
While the proposed EIP-1559 is designed to help reduce transaction costs, its design has also been dubbed the “scarcity engine for Ethereum.” That’s because the basic transaction fees that users pay are sent to the network instead of going to miners and “burned” reducing the supply.
Messari research analyst Wilson Withum said:
“Ethereum’s annual net issuance will decrease significantly after the merger of ETH 1’s phase 1.5 into ETH 2.”
The markets are excited about this prospect as a decrease in new ETH issuance could put pressure on the supply due to the limited amount of new ETH entering circulation. Just like Bitcoin’s halving events that occur roughly every four years reduce the amount of new BTC in circulation, burning gas fees causes the price to spike. But not everyone is happy.
The uprising of miner
The improvement proposal was met with fierce resistance from several mining pools. Flexpool launched an anti-EIP marketing campaign in early 2021, which was joined by several other pools.
Sparkpool, the largest mining pool with around 24% hashrate, said in a tweet that it opposes the proposal, while F2Pool (which holds about 11% of the network’s hashrate) is in favor of the change.
In January, Bitfly, the operator behind Ethereum’s second-largest mining pool, Ethermine (which has about 20% hashrate), said in a Twitter post that it is “against the adoption of EIP-1559 in current state,” argued “the future of Ethereum could be at risk.”
This brings up a conundrum for Ethereum: more than 50% of Ethereum’s total hashrate is against EIP-1559. It’s unclear how that might affect the proposed implementation, but some miners have been looking for alternative revenue streams, most notably miner extracted value (MEV).
This controversial technique involves mining pools using bots to probe transactions in the network’s mempool – a store of transactions that are about to be verified – in search of arbitrage trades they have. copy and make a profit.
Once they have copied the transaction, they will increase the price of gas to verify the transaction and even push the miner’s transaction over the network before the currently pending transaction.
“After crawling on the Ethereum blockchain starting with the first block of 2020 (9193266), we found a total of at least $314 million (~540k ETH) in MEV extracted since May 1st. 1 in 2020,” a Medium article from the Flashbots research team explained earlier this year.
Some mining pools disagree with the above approach and have even built tools to prevent miners from doing so. One of the largest is SparkPool’s Taichi Network which prevents bots from tracking what transactions are currently in the queue.
With the transition to the POS network still far away, it is expected that Ethereum as well as the ETH price will have a not-so-smooth summer when EIP-1559 comes into operation.