What is EIP-1559? Will It Split The Ethereum Community?

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In Brief:

  • EIP-1559 proposes to burn a significant portion of their gas fees (transaction fees) and bring Ethereum’s gas management under control.
  • This proposal is extremely controversial and has seemingly split the Ethereum community into two.
  • Pro EIP-1559 folks believe that the proposal is necessary for the future growth of Ethereum’s ecosystem.
  • Anti EIP-1559 folks believe that the proposal isn’t fair on small-to-medium-sized pools since it eats into their income.

EIP-1559 has become one of the hottest topics of discussion among Ethereum developers and miners. Some say this will be one of the most important upgrades that Ethereum will go through and make the DeFi ecosystem richer than it already is. While others believe the upgrade will rob Ethereum miners of their hard-earned money.

We are not taking any sides here. But let’s take a look at what EIP-1559 is and see what its supporters and detractors have to say.

Ethereum’s Gas Problem

Alright, so let’s start with the basics – what is Ethereum gas?

Think of Ethereum as a global, decentralized supercomputer, wherein developers from all over the world can rent out computational resources to execute their smart contracts and run dApps. Every single line of code requires these resources, aka gas, that’s siphoned from Ethereum’s mining network. As such, contract execution requires one to pay gas fees to the miners in exchange for the computational power that’s being taken from them.

Simply put, if you want to make a transaction, you will need to pay a certain amount of fees for the miners to pick it up and actually process it. You may pay higher fees and make your transaction jump the queue for faster execution.

Reread the last line because that’s where the real problem lies.

Why Are Ethereum Gas Fees So High?

Ethereum right now is extremely slow. It can only do 15-25 transactions per second, which is pretty dismal compared to Visa (~1,700 tps average) and Paypal (~115 tps average). With such low scalability and variable gas fees, the problem is that if demand in the network shoots up, the entire blockchain gets congested with pending transactions. The only thing you can do in these circumstances is to boost up the gas fees and push your transaction up the queue.

The following chart shows the average gas fees over the last six months.

Image: Santiment

As you can see, since the beginning of March 2021, the transaction fees were between $13 and $17. In the month of February 2021, the transaction fees were around $15 and $37.60!

These are figures for an average wallet-to-wallet transaction. Imagine how much you would have to pay for a more complicated smart contract.

These excessive gas fees are a massive obstacle to DeFi adoption. Right now, the DeFi market is one of the most innovative spaces in not just the decentralized world but the finance sector in general. EIP-1559 will address these problems and make the gas fees more manageable.

How Can EIP-1559 Help Here?

EIP stands for Ethereum Improvement Proposal, which are changes to the platform proposed by a community member. If the proposal gets the requisite amount of votes, it gets implemented. Following integration, EIP-1559 will achieve two major things:

  • Establish a market rate for block inclusion.
  • Burn the majority of the ETH in transaction fees.

The Market Rate For Gas

“BASEFEE” is a concept hardcoded into Ethereum that determines the base rate for gas fees paid in the network depending on the congestion levels.  If Ethereum is >50% utilized, the BASEFEE and automatically increases. If it is <50% used, the BASEFEE decreases.

BASEFEE is essential in establishing a homogeneous gas fee rate throughout the network to make gas fee payments as straightforward as possible. It formalizes the going market rate for block inclusion and removes each individual wallet’s need to generate its own gas estimation strategy.

EIP-1559 Burns BASEFEE

The new proposal burns the BASEFEE and prevents the miners from potentially manipulating the fee structure to squeeze out more money from the system. Doing this also provides a deflationary mechanism to Ether’s supply, which adds to Ether’s scarcity and long-term security of Ethereum. However, the most significant advantage of the burning is that it provides a much better user experience of gas management by removing the current auction-style mechanism, which may not be a sustainable business model.

The core developers have agreed to integrate EIP-1559 in the July London hard-fork.

The Flipside – Are We Robbing The Miners?

Image: Etherscan

The chart above shows you the overall hashrate distribution for Ethereum. The two most dominant pools – Spark Pool and Ethermine may have enough resources to offset any losses. After all, they are mining the majority of the blocks due to their superior hash power and are receiving enough block rewards, as is.

However, EIP-1559 could potentially damage the small-to-medium-sized pools. Miners are the backbone of a decentralized proof-of-work ecosystem, and robbing them of their gas fees may not be in the best interest of the Ethereum network.

This is why, to oppose the proposal, On April 1, these mining pools will direct their hashing power to Ethermine. This coordinated “attack” will last 51 hours to signify their intent to capture more than 51% of the network hashrate. The purpose of this attack is to show the network what exactly could happen if the miners decide to gang up and work against Ethereum.

Which Side Of The Debate Are You On?

Like we have said before, we are not taking any sides in this debate. Gas management is vital for the future growth of the decentralized app ecosystem. However, should it be achieved at the expense of the miners? Can the controversy surrounding EIP-1559 really trigger another Ethereum-Ethereum Classic type hard-fork?

Anyway, here is what the Ethereum community thinks. Now, let us know what you think!

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