What You Should Know About EIP 1559

EIP stands for Ethereum Improvement Proposals. But before we delve deeper into what the latest “EIP 1559” signifies, let’s start with what EIPs are.

What Are Ethereum Improvement Proposals (EIPs)?

EIPs are standards that specify potential new features for the Ethereum network. They contain detailed specifications for the changes to be implemented, and communities can access these proposals as their source of truth. Anyone from the Ethereum community can create an EIP because there’s a well-laid-out structural guideline on how to write EIPs. The requirements are precise. The community member who proposes an improvement should provide a concise technical specification. The specification would entail what the features are and what rationale drives them.

The next step that the EIP author takes is building consensus within the community around the proposal and document the opposing opinions. The network has set a high bar for the submission process of the EIPs. Most of the EIP authors who qualify are application or protocol developers, highly competent technically.

The Importance of the Ethereum Improvement Proposals

EIPs are an integral part of how the Ethereum network evolves. Therefore, debates around an improvement proposal play a key role in deciding how the network would change and progress over time.

EIPs can be of different types depending on their impact on the future functioning of the network. EIP 1559 is a crucial proposal in that regard. We will discuss the factors that make it vital in the segments to come. In general, the core EIPs for low-level protocol changes affect consensus. They also require a network upgrade and ERCs for application standards.

Each time a network upgrade happens, it comes with a set of EIPs. Each Ethereum client on the network needs to implement these EIPs.

EIPs are also vital from the network governance perspective. It is the basic unit around which Ethereum governance develops. Anyone can propose an EIP, and all community stakeholders can debate it. The goal is to decide whether the proposal should be adopted as a standard or included in the network upgrade.

All the EIPs are stored in the Github repository that started in October 2015. The current EIP editors include Alex Beregszaszi, Casey Detrio, and Hudson James of the Ethereum Foundation, and Greg Colvin, Nick Savers, and Micah Zoltu from the community, among others. The EIP editors do not decide the fate of an improvement proposal. Instead, their job is to review the proposals for technical soundness, correct spelling/grammar, and code style.

The London Hard Fork: The Arrival of EIP 1559

Ethereum activated its London Hard Fork on August 5th, 2021. Although it included five EIPs, everyone was excited about the EIP 1559.

At its core, EIP 1559 is a proposal that seeks to reform the Ethereum fee market

The proposal was created on April 13th, 2019, by Vitalik Buterin, Eric Conner, Rick Dudley, Matthew Slipper, Ian Norden, and Abdelhamid Bakhta. In short, EIP 1559 introduced a transaction pricing mechanism that included a fixed-per-block network fee that burns and dynamically expands/contracts block sizes to deal with transient congestion. Transactions need to pay this fee, known as Basefee as well. This fee gets adjusted on a block-by-block basis, and the final aim is to target such a value at which the average block gas usage remains at a level as close as possible to the current gas limit.

There are several issues that EIP 1559 addresses. To begin with, it addresses the mismatch between transaction fee level volatilities and the social cost of transactions. Fees on public blockchains that draw a heavy volume of transactions are usually volatile. On Ethereum, for instance, fees fluctuated from a level of 2 gwei to 20-50 gwei, where one ETH equals 10^9 gwei. There has been at least one occasion when the fees have gone up to as high as 200 gwei. Such a high level of volatility caused inefficiencies and unpredictability in the system.

Secondly, the new fee structure also addresses the issue of first-price auctions inefficiencies. In the first price auction system, the transaction senders first published a transaction with a fee. Next, it was up to the miners to choose the highest-paying transactions, and everyone had to pay what they bid. It was again an inefficient system, leading to frequent overpayments.

The third issue that the EIP 1559 addressed was the problem of the instability of blockchains with no block reward. Blockchains like Bitcoin and ZCash that currently do not have any issuance prefer to switch to reward miners entirely through transaction fees. It leads to further instability and incentivizes mining sister blocks that end up stealing transaction fees.

The Benefits of EIP 1559

The proposal addresses the issue of social cost mismatch that stems from fee volatility. The newly introduced fee mechanism functions like a fixed fee in the short run and a cap in the longer run.

The implementation of the 1559 improvement proposal also replaces the auction with a fixed-price sale. It efficiently mitigates the first-price auction inefficiencies. Fee estimation also becomes more straightforward. You can now easily calculate the fee for the next block. You pay it if you can afford it. Otherwise, you don’t.

Finally, the implementation of the proposal also helps create a mechanism similar to the permanent block reward system. It again reduces many instability issues with fee-only blockchains. Moreover, it does not require the blockchain to have permanent issuance.

Altogether, EIP 1559 makes gas prices on Ethereum predictable and securely measurable. With the implementation of the EIP 1559, the Basefee can only be manipulated at a high cost. Even the miners need to pay fees for dummy transactions.
Why is the Community Excited About EIP-1559?

So, Why Is EIP 1559 A Big Deal?

The proposal corrects an inefficient fee market. There existed a difference between the average gas price and the 10th percentile gas price in a regular block. This difference was massive and could range from anywhere between 3-times for the median to 5-8-times for the mean. This difference meant users were overpaying. Those who chose not to overpay had to suffer a 1-2 minutes delay. EIP 1559 allowed the inclusion of more transactions immediately.

After EIP 1559’s implementation in the London Hard Fork, the proposal that was on everybody’s mind was EIP-3554. It would play a crucial role in Ethereum’s journey to Ethereum 2.0. The proposal deals with a vital deadline. A deadline by which Ethereum miners will be motivated to upgrade their software to prepare for the switch to 2.0. This deadline is known as the “difficulty bomb.” The proposal has shifted that deadline from Summer 2022 to December 2021.

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