EIP-1559: the arbitrator on transaction fees

EIP-1559: the arbitrator on transaction fees

By MikeZillo | Blockchain Insights | 7 Apr 2021


In practice, with this initiative, innovations are introduced in terms of fees: less commissions and faster processing of transactions.

That said, it might seem like a panacea for ETH transactions, but let's see this innovation in details.

What is it about?

First proposed by Vitalik Buterin in 2018 and is the most anticipated innovation in the history of Ethereum.

Goodbye single rate

This innovation will establish two components of the commissions: a base rate and an inclusion fee. The first is destined to the burn, while the second will become the reward of the miners.

Variable block size

As a function of network congestion, the gas limit of the block becomes dynamic: from the current 12.5 million it passes to a maximum of 25.

It should be noted that the limit does not mean that when the network is congested the gas rises to 25 million, if a gas of 15 million is enough to cope with the congestion, it does not reach 25 million.

A step back: the auction in commissions.

Surely you have had to perform transactions in Ethereum's BC several times: as soon as you confirm the address, you are asked what fees we are willing to pay.

This is because the more we offer, the more miners are enticed to fulfill our transaction.

Basically it is as if we set up an auction with the miners to decide how much to pay for our transaction.

This first-price auction model was established to prioritize higher-value transactions and prevent the BC from becoming congested with lower-value transactions.

However, the model inevitably leads to not being able to calculate the optimal price of a single transaction.

Let's take a numerical example: the previous transaction was compensated at $ 8, it goes without saying that the next one we decide to place the reward for miners at $ 10.

But if everyone offered $ 5, a $ 6 offer would be enough to save $ 4 right away.

In practice, the current conditions of Ethereum do not allow to precisely estimate the commission that should be paid.

Uniform price auction is a probable solution

The uniform price auction is nothing more than an incremental bid, or the next one is higher than the previous one. In this case, however, there could be a loophole for miners: by including their transactions in a block, they would artificially pump up commissions, maximizing their revenue.

EIP-1559 the solution?

This innovation, as I explained earlier, divides the commissions into two variables: the basic commission and the inclusion commission.

The first (base fee) is a fixed network fee for each block that any transaction must include. The calculation (hereinafter the formula) is based on the gas used by the parent block and the target gas of the parent block; better known as the gas limit.

basefee

As it is easy to deduce if the blocks are above the target gas limit, the base rate will increase while if they are below, it will decrease.

It should be borne in mind that gas is dynamic and therefore can go from 12.5 million to 25 million; this is due to a possible congestion of the network.

Ethereum's deflationary maneuver

This is an excellent idea to contain the inflation that each currency is affected by, in fact the base rate will suffer a burn thus exerting a deflationary pressure on Ethereum.

We cannot call it controlled inflation because this basic commission is always variable although calculable.

It was found that from the current issue of 4.5% of Ethereum / year, through this operation we pass to 0.5% -1%.

A great result!

Effects on Miners

This proposal is nothing short of disastrous for Miners' revenues: just think that the transaction fees have brought nearly $ 650 million into their pockets.

The reason why the miners are not completely in agreement on this proposal is because the share of inclusion - the one allocated for their work - is at the discretion of the people.

In fact, users can decide whether to add the inclusion quota or not.

Following this possibility, two factions have emerged: the supporters and the detractors.

The supporting pool is F2Pool, holder of about 11% of the BTC network hashrate, while the opposing pool is Sparkpool (which has, in a combined manner, more than 50% of the hashrate).

All this does not intimidate the management of Ethereum in the least, in fact EIP-1559 will be active following the London Hard-Fork which will take place in July of this year.

What do you think about the category of miners, of which I am also a member?

Personally, however, the revenues will drop, I see it as a point in favor of the democracy of Crypto, although I would remove the right to pay the inclusion fee and set it at a minimum; and you?


MikeZillo
MikeZillo

Daily Trader, Mining Farm Project Manager, Blockchain consultant, Cryptocurrency evangelist. You can find more videos here https://www.youtube.com/channel/UCvyXx6I1C__zmLAYUXNZwQQ?


Blockchain Insights
Blockchain Insights

Working as a consultant for Blockchain projects, an operative experience comes by itself. In this Blog I am share Blockchain applications, pros and cons, practical use cases I got in touch with. Of course, a good understanding of the topic will be provided with dedicated contents

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