EIP-1559 (London Network Upgrade) Explained
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A new upgrade to Ethereum was recently launched in August 2021, known as the London Network Upgrade, or Ethereum Improvement Proposal (EIP)-1559.
Will this upgrade help to finally reduce the high gas fees that you experience while transacting on the Ethereum network?
Here’s what you need to know.
What is EIP-1599?
The Ethereum Improvement Proposal (EIP)-1559 was implemented on 4th August 2021 to change how Ethereum gas fees were being paid to the miners who processed these transactions.
For every transaction that you make on the Ethereum network, you will be paying the miners a fee to process this transaction.
Gas prices are calculated in gwei, which represents 0.000000001 ETH (or 10^9 ETH). In the old system, it used to be an auction-style fee market, where the miners would process the transactions with the highest fee.
However, with this new proposal, miner fees are now more transparent, which helps to reduce the volatility of the gas fees that you pay.
How does EIP-1559 work?
To calculate the miner fee that you need to pay after the EIP-1559 upgrade, there are 3 components that you will need to consider:
#1 Base fee
The base fee is the minimum fee that is to be included to process the transaction.
This fee is dependent on how congested the Ethereum network is. The higher the congestion, the higher the base fee (and vice versa).
In the old model, each transaction block has the same size of 15 million gas. However, EIP-1559 allows the block size to be increased to a maximum of 30 million gas.
This makes the block size dependent on the network congestion, where it can be increased to accommodate the increase in demand or vice versa.
The target block size for each block on the Ethereum blockchain is 15 million, and the base fee will be adjusted accordingly to reach this equilibrium.
For example, more congestion will lead to a higher base fee, which discourages more people from making a transaction. This helps to reduce the number of transactions, and the block size can be slowly decreased.
In contrast, less congestion (which results in a block size of < 15 million) will lead to lower base fees. This will encourage more people to process transactions on the Ethereum network, which result in the block size slowly being increased to the target of 15 million.
In this way, the dynamic base fee helps to achieve the equilibrium block size of 15 million.
One thing that is different for the base fee is that this fee is burnt.
This means that the base fee does not go to the miner, but it is removed from the total supply of ETH that is available.
In the previous system, the miners would be able to receive this base fee. However, this is no longer the case after EIP-1559.
#2 Miner tip
A miner tip acts as an incentive to the miners to prioritise your transaction over another transaction. This is based on the rationale that if both transactions require the same computing power, the miner will choose the transaction with the higher tip.
If you would like your transaction to be processed faster, you may have to pay a higher tip!
With the new changes to how mining fees work, the miner tip is the only way that miners will profit from each transaction. As such, this may decrease the amount that a miner earns from processing each transaction on the Ethereum network.
#3 Max fee
You are also able to set a maximum fee that you are willing to pay to process each transaction on the Ethereum network. This limit helps to ensure that you do not overpay to process your transaction.
For a transaction to be executed on the Ethereum network, the max fee must be greater than the sum of the base fee and the miner tip.
Max Fee ≥ Base Fee + Miner Tip
If your max fee is lower than the sum of your base fee and miner tip, your transaction will not be processed.
How does this apply to me when I’m using Krystal?
If you’re using the Krystal app, you can view the estimated gas fee that you will incur when making a swap by tapping on the gear icon.
This will bring you to the ‘Basic’ setting, where you can see the different gas fees that are recommended by Krystal, based on how fast you would like your transaction to be processed.
The faster you would want your transaction to be processed, the higher the gas fee you’ll need to pay.
If you would like to optimise the gas fees that you are paying, you can go to the ‘Advanced’ tab.
Over here, you are able to edit the 2 of the 3 parameters that we talked about earlier:
- Max priority fee (aka miner fee)
- Max fee
You may want to note that these fees are calculated in gwei.
It is not possible for you to edit the base fee, since this is dependent on the current congestion of the network. However, you can check the latest base fees (in gwei) on various dashboards such as Etherscan.
With reference to Etherscan, this allows you to set the max fee that you are willing to pay.
You can use the current base price (in this case it is 106 gwei) and the priority fee (or miner tip) of 1 gwei to determine the optimised max fee that you are willing to pay (Max Fee ≥ Base Fee on Etherscan + Miner Tip AKA Priority).
In this case, the optimal max fee that you can pay is 107 gwei. However, you may want to note that the prices shown on Etherscan can fluctuate over time.
In this case, if you set your max fee to be lower than 107 gwei, your transaction may not be processed!
It is possible to change the gas limit of your transaction as well. For a swap transaction, this requires more computing power compared to a transfer from one wallet to another.
As such, the gas limit of a swap transaction may be much higher (a few 100,000) compared to a standard ETH transfer (21,000 gas limit).
However, if your gas limit is higher than the actual gas limit that is required, you will be refunded the difference.
For example, let’s say that the gas limit for a swap transaction is 480,000. If you’ve selected a gas limit of 500,000, you will be refunded the excess of 20,000 gas.
However, if you set the gas limit to be 470,000, your transaction will not be processed as it is below the actual gas limit!
It would be best not to change this gas limit, as there may be a risk that you set it too low and your transaction will not go through.
Calculating the total gas fee that you pay on Krystal
To calculate the total gas fees that you pay, you can use the formula below:
If you have set a max fee, you will use this in place of the (base fee + tip).
In the example above, we have set the max fee to be 186 gwei, and the gas limit to be 500,000.
As such, the total gas fee that we will need to pay is 93 million gwei, or 0.093 ETH.
You can then calculate the price you are paying in USD by multiplying 0.093 ETH by the current price of ETH in USD.
This will give you a better estimate of the gas fee that you will incur when making a transaction with Krystal!
Moreover, if your transaction uses less gas than you have set, you will be refunded the excess.
What happens if my swap transaction is stuck?
Your transaction may be ‘stuck’ on the Ethereum network if the max fee that you inserted is less than the current gas required to process a transaction.
For example, the current gas required may be 100 gwei. If you set your max fee to be less than 100 gwei, your transaction will not be processed.
One possible solution would be to cancel your transaction on Krystal.
However, you will need to pay a transaction fee for each cancellation you make.
If you have connected your Metamask wallet to Krystal, there are a few strategies you can use:
- Speed up your transaction
- Cancel your transaction
When your transaction is still processing, you can choose to speed up your transaction. This will increase the gas that you pay, which most likely results in a higher transaction fee.
Another way that you can troubleshoot a stuck transaction is by cancelling a transaction. This can be done in 2 ways:
- In-app cancellation (your transaction must still be pending on the network)
- Custom nonce (you may incur additional gas fees)
If you’re still confused, you can refer to this YouTube video which helps to explain the various steps you can use.
The same concepts apply to the Avalanche chain too
If you are using the Avalanche chain to conduct swaps on Krystal, EIP-1559 can be applied here as well.
However, the Avalanche network is different from the Ethereum network, where both the base fee and priority fee are burned.
Meanwhile, only the base fee is burned on the Ethereum network.
How is EIP-1559 different from the old model of transaction fees?
When the old model of Ethereum gas fees was used, it was very hard to predict the optimal gas fees you were required to pay for each transaction.
This was because the previous model uses an ‘auction’ to determine which transactions would be processed, based on the transaction fee that you’re willing to pay.
As a result, you may actually overpay for your transaction to be processed. Alternatively, your transaction may not go through, because you underpaid your transaction fee!
The model introduced by EIP-1559 helped to make transaction fees more predictable.
This helps you to get a better estimation of the transaction fees that you need to pay before submitting the transaction on the blockchain.
How can I benefit from EIP-1559?
The main way that you are able to benefit from EIP-1559 is through greater transparency in the gas fees that you’ll need to pay.
However, this doesn’t mean that the gas fees you pay are reduced because of EIP-1559!
The only way that gas fees can be reduced is through greater scalability either through the use of Layer 2 solutions (e.g. Polygon or Arbitrum), or when ETH 2.0 is released.
Scalability helps to reduce network congestion, while EIP-1559 only helps to improve the transparency in the gas fees that you pay.
Furthermore, if you’re an ETH long-term holder, it could be possible that the EIP-1559 upgrade could result in ETH becoming deflationary.
This is because the base fees of each transaction are burnt, instead of being passed down to the miners.
However, this may not always be the case. A miner will receive a flat reward of 2 ETH for every block that they process on the Ethereum network.
For ETH to be truly deflationary, the amount of base fees burnt per block has to be greater than the block reward that the miner receives. Only then, will the supply of ETH will be less than that being created.
The EIP-1559 upgrade will be useful in helping you to estimate the amount of gas fees that you’ll need to pay per transaction on the Ethereum network.
It may result in ETH being deflationary too, but only if the amount of base fees burnt is greater than the block reward.
Moreover, EIP-1559 does not necessarily reduce gas fees, as that can be only done through increasing the scalability of the Ethereum network (by Layer 2 solutions or ETH 2.0). Instead, it will reduce the chance of you having to overpay for a transaction on the Ethereum network!
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