All You Need to Know About EIP-1559
A major change to the structure of Ethereum transactions is expected to take place this week with the launch of Ethereum improvement proposal (EIP) 1559. This article takes a look at how transactions work before and after EIP 1559, and provides an overview of new features that will be included in the protocol.
Before EIP 1559, Ethereum used a first-price auction mechanism to decide on the price of transaction fees. This means that miners prioritized the highest bidders when deciding which transactions to include in each new block in the public ledger.
One of the biggest problems with this model is that users can’t plan for large fluctuations in gas price. For each transaction, users must guess what gas price will be accepted by the miners, without any knowledge of the current bidding behaviour of other users.
Wallets like MetaMask provide a rough estimate of gas prices, but neither wallets nor individual users can account for rapid shifts in market conditions. At any given time, gas fee estimates may prove to be too low to be prioritized by the miners, or too high and thus a waste of money.
EIP 1559 will adjust the transaction fee mechanism to solve this problem and make a few other key improvements.
Breaking Down an EIP 1559 Transaction
Under EIP 1559, a transaction requires three pieces of information: a Base Fee amount, a Priority Fee amount, and a Max Fee amount.
The Base Fee is the minimum amount of gas needed to include the transaction in a block. This amount is set by the protocol, and is adjusted automatically for each new block based on traffic. The entire Base Fee amount in each transaction is burned (more on this later).
The Priority Fee, also known as the “tip,” is the amount that the user is willing to tip the miner for processing the transaction. The user sets this amount with each transaction, and it is paid to the miner. Many experts expect that the default tip cost will be 2 gwei.
The Max Fee is the highest amount that the user is willing to pay for the transaction. The user sets this amount with each transaction.
When transactions are submitted, the protocol will make sure that the Max Fee set by the user is greater than the Base Fee plus the Priority Fee. If it is, the transaction will go through. Any leftover amount will remain in the user’s wallet.
New Features Under EIP 1559
In addition to changing the structure of transactions, EIP 1559 introduces two new features: flexible block size and burning of the base fee.
By introducing flexible block size, Ethereum will be better prepared to handle massive surges in demand. Before EIP 1559, all blocks were capped at 15 million gas, meaning that gas prices would rise significantly and unpredictably as users attempted to out-bid each other for inclusion in full blocks.
After EIP 1559, blocks will be able to increase in size to accommodate surges in demand. Importantly, Ethereum has set a target size for blocks under EIP 1559, and the Base Fee amount is tied to block size. The Base Fee amount will rise if blocks are larger than the target size, and fall if blocks are smaller than the target. This new feature will result in a smoother and more predictable increase in gas prices during surges in demand.
A second important feature of EIP 1559 is that miners will now “burn” the Base Fee in each transaction. This means that the entire value of the Base Fee submitted with each transaction will be destroyed, or removed from circulation.
This accomplishes two things: it ensures that miners won’t be motivated to manipulate the price of the Base Fee, since it is not paid to them. Secondly, it makes ETH an essential component of the Ethereum protocol. Previously, there were ways to pay miners with other cryptocurrencies or fiat currencies outside of the protocol to bribe them to prioritize certain transactions. Now, users must own and use ETH in order to submit transactions through the protocol.
What is the Point of EIP 1559?
This article has already hinted at some of the benefits of implementing EIP 1559, which fall broadly under two categories: improved user experience and enhanced security.
By modifying the fee structure and implementing flexible block size, Ethereum seeks to make gas fees and transaction processing times much more predictable. Users will have more information up front that will help decide an appropriate Max Fee and thus get transactions included in upcoming blocks with much greater consistency.
Meanwhile, the Base Fee burn will work with the upcoming ETH2 merge to ensure that Ethereum is deflationary, retaining its value for users. Vitally, this feature also makes ETH inherent to the Ethereum protocol. The Base Fee burn addresses several weaknesses in the existing protocol, such as drastically reducing the ability to bribe miners, making Ethereum even more secure in the long-term.