What Is EIP 1559 London Upgrade & How It Will Change Ethereum Forever?

What Is EIP 1559 London Upgrade & How It Will Change Ethereum Forever?

By CryptoWise | CryptoWise | 19 Jun 2021


EIP 1559: The Great Ethereum’s London Upgrade Is About To Hit The TestNet! Today we will explore this most awaited event of the year in detail

 

1*VKT38CUMaNNqk1d6Pa9odA.jpeg Source: digifinex

I Feel

Few events have the power to change humanity for the larger good, I feel Ethereum’s London upgrade is one such life-changing event for Ethereum and its ecosystem, which will make it an even more valuable asset to posess

As per Ethereum’s official blog post:

The long-anticipated London upgrade is now ready for deployment on the Ethereum testnets! The upgrade will first go live on Ropsten, at block 10499401, which is expected to happen around June 24, 2021.

Here is the list of the estimated timelines:

  • The London hard fork will go live on Ropsten TestNet by June 24th.
  • Then it will move to Goerli testnet by June 30th
  • Then it will move finally to Rinkeby testnet on July 7th

Once these test phases of the upgrades are done, then a final date to move on to the Mainnet will be decided. Now that your excitement has risen, it is time to discuss what are the proposed upgrades and their significance for the Ethereum 2.0

What Are Proposed London EIP Upgrades?

Ethereum 2.0 London Upgrade has the following Ethereum Improvement Proposal (EIP)which are slated to be rolled out and agreed upon by the Ethereum community before they can be adopted and be ready for production rollout on MainNet.

These EIP’s Are:

  • EIP-1559: A proposal to reform the Ethereum fee market
  • EIP-3198: BASE FEE opcode
  • EIP-3529: Reduction in refunds
  • EIP-3541: Reject new contracts starting with the 0xEF byte
  • EIP-3554: Difficulty Bomb Delay to December 1st, 2021

 

What Is EIP-1559 Upgrade & Why it Is Proposed?

 

One of the major updates happening in Ethereum 2.0 is “How the miners will be rewarded in terms of Fees in a PoS based blockchain network?”

But why this upgrade is so critical, well to understand the same we need to un-layer the underlying problem which exists with the current of ETH 1.0 mining & rewarding process.

The Ethereum 1.0 version currently uses a PoW mechanism, where the transaction fee is priced based on the auction made by the concerned users. The miners in the network preferably pick those transactions which have the highest bid, which eventually gets paid as a mining fee to the miners. This mechanism has some major flaw leading to performance & trust issue, let’s understand what are those,

The transaction gets way too slow sometimes:

Ethereum blockchain is already quite matured and has high traffic demand, leading to heavy network congestion, which leads to a high level of price volatility. Due to strict Gas limit per block along with price uncertainty, some transaction takes way too long to be accepted, before being added.

The delay which gets triggered due to the above reasons becomes highly unavailable for the user and miners. Speed is a very crucial factor while trading on dex, so if the transaction gets delayed for some decentralized exchanges such as Uniswap, where token prices can swing rapidly; traders may end up losing money due to delay in the transaction processing.

Fee Overpayment:

Due to the Auction mechanism, senders have to pay what they bid, this process has been highly inefficient by design and involves a very complex Algo to estimate the fees to be paid, many times this Algo falters and ends up paying higher reward than it was supposed to pay, this is somewhat not sustainable on the part of bidders.

So in a nutshell: Problems like

  • Network lag in processing transaction due to congestion
  • High Gas Fee & Price volatility
  • Fee Payout discrepancies

Has been the major motivation that has led to the proposed EIP enhancement The proposed EIP 1559 reform is here to take care of all the above-discussed inefficiencies,

 

What Are The Proposed Improvement in EIP 1559:

This Ethereum improvement proposal's main objective is to make the fee market in its network more efficient and reliable. To achieve this it has proposed the following amendments

As per Ethereum EIP upgrade FAQ:

  • The Gas limit will be replaced by two values: — Long term average target & hard per-block cap which will be capped to twice of current gas limit
  • It will also set a BASE FEE(which will be burned to make Ethereum deflationary ) against every user transaction, This base fee will be adjusted on a block-by-block basis, to ensure the average gas fee is controlled to remain very close to the current gas limit value
  • Every time there is an increase in network congestion leading to excessive target per-block gas usage, the base fee increases accordingly and when the block capacity is below the set target limit, the base decreases. The change in the base fee will be working within the set range so it will easy to predict the Gas fee and will make the market fee more transparent and reliable

Impact of The Proposed Changes On Miners Fee:

 

As discussed that base fee will be set to start with, but it is expected that most users will not have to manually adjust gas fees, even in times of high network congestion, in fact for most users the base fee will be estimated by their wallet and a small priority fee(Tip to miners), will be automatically set. Users will be allowed to set the max fee threshold to control their cost to be paid.

So what is in there for miners in this EIP upgrade?

  • Miners are incentivized via priority fee which will be set aside in the user wallet, and the base fee will be eventually burned down by the Ethereum protocol. Which many miners are finding distasteful as their reward is being curtailed, compared to the risk they are taking to be a miner.
  • Even though it may look like miners are being robbed of those extra earning due to base fee burning, it will eventually be more beneficial. Why so? Well because with Less ETH in circulation the value of the ETH they will hold will be more, due to supply shock.

 

What Is Ethereum’s Objective In Burning The Base Fee?

  • Ethereum network with ETH 2.0 and EIP 1559 upgrade wants to make Ehereum deflationary to some extent if not completely, and enhance its economic value within the blockchain ecosystem. This will also create the necessary balance where miners will not become powerful enough to challenge the very fabric of decentralization.
  • With BASEFEE burning, the Ethereum network is trying to ensure that miners don’t end up manipulating the block to juice out extra fees, as now any fee other than the priority(Tip) fee will eventually vanish.

 

What Ethereum Team Has To Say About Limited Token Supply Apprehension Due To Base Fee Burning?

Ethereum has clearly expressed in their EIP blog that :

By burning the base fee, we can no longer guarantee a fixed token supply. This could result in economic instability as the long term supply of ETH will no longer be constant over time. While a valid concern, it is difficult to quantify how much of an impact this will have. If more is burned on base fee than is generated in mining rewards then ETH will be deflationary and if more is generated in mining rewards than is burned then ETH will be inflationary.
Since we cannot control user demand for block space, we cannot assert at the moment whether ETH will end up inflationary or deflationary, so this change causes the core developers to lose some control over Ethereum’s long term monetary policy.

Let’s Summarize :

I feel:

This update will set a new beginning for one of the most beloved blockchain projects and also will be impacting the life of the developers, miners, investors, and traders in a positive way. Everyone will be a winner eventually if they have the required sense of accountability and a vision to go long on this new ETH 2.0 journey.

For further technical & in-depth detail please read their EIP blog & faqs below :

EIP-1559: Fee market change for ETH 1.0 chain
A transaction pricing mechanism that includes fixed-per-block network fee that is burned and dynamically…eips.ethereum.org
EIP 1559 FAQ - HackMD
EIP 1559 FAQ ## What is EIP 1559 [EIP 1559](https://eips.ethereum.org/EIPS/eip-1559) is a proposnotes.ethereum.org
 

Disclaimer!

Opinions expressed here at CryptoWise are not investment advice and are only for educational purposes. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency, or digital assets. Please be advised that your transfers and trades are at your own risk, and any losses you may incur are your responsibility

NOTE!

This article was originally published on my Medium account, here is the link:

https://medium.com/crypto-wisdom/eip-1559-the-great-ethereums-london-upgrade-is-about-to-hit-the-testnet-6902202e0efd

 

 

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