In a few hours, Ethereum is pushing a mainnet upgrade known as “London,” and it’s the most significant update to Ethereum’s core protocol in a long time. Within London, one change has made most of the headlines, and that’s Ethereum Improvement Proposal 1559 (EIP-1559). Why should you care about EIP 1559?
Because it fundamentally changes the economics of Ether (ETH) and could have numerous second-order effects within crypto markets. Here is a brief overview of EIP 1559 and what it means going forward.
EIP 1559 in three points
First, some basics. Every transaction on the Ethereum network requires that the user pay a gas fee to the miner who confirms the transaction. In the last six months, the spike in NFT popularity, among other things, has increased traffic on the network and made these transaction fees increasingly high, so high that many smaller retail investors were effectively priced out of the market.
Second, with EIP-1559, two key changes are introduced to this system: the first is a mechanism designed to ensure that fees are more stable and predictable. The second, and this is the one that really gets people fired up, is reducing the circulating supply of ETH over time. Post-upgrade, users will be charged a “base fee” predetermined by your wallet with the option to speed up, just as you can do now in MetaMask.
Third, this transaction fee previously was awarded to miners, but now it will automatically be removed from circulation by the network. By burning ETH, Ethereum reduces its monetary supply over time, which creates the possibility for price increases if demand is steady or goes up. Some have speculated that this will make ETH a better store of value asset, similar to Bitcoin, and make it a more attractive option to more traditional investors. In sum, this is why people are frothing at the mouth.
And finally, it’s also important to understand that the London mainnet upgrade is a hard fork which means that it has gained the approval of most, Ethereum’s miners, developers, and investors. It should also be noted that there isn’t a perfect consensus around the London upgrade or EIP 1559—with some miners raising concerns over how it will affect their income. Regardless, it’s scheduled to go live at Ethereum block 12,965,000, and I, for one, am very curious to see what this will mean over the next six months.