EIP-1559 supports the value of ETH: improving the security of Ethereum, solving economic abstraction and other issues

Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.

Blue Fox Notes (ID: lanhubiji)

What is EIP-1559?

, reprinted by Odaily with authorization.

EIP-1559 is an important proposal of Ethereum, which will have a major impact on the value capture, user experience, security and other aspects of ETH in the future. In the short to medium term, the price impact of the EIP-1559 proposal on ETH may be second only to ETH's PoS. In the long run, it may have a more lasting influence.

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EIP-1559 is essentially a solution to the Ethereum network transaction pricing mechanism, which includes a fixed part of the base fee for each block of network fees (that is, the base fee, which will be destroyed and miners cannot receive this fee), and also There is a dynamically scalable block size design to cope with instantaneous network congestion.

• fee structure

Although the basic fee per block is fixed, it will adjust the basic fee per block according to the congestion of the network. It has a formula to adjust the rise or fall of the basic fee. It will be adjusted according to the gas used in the previous block and the target gas (gas target, which is the previous gas limit). When the block is higher than the target gas price, the base fee increases, and when the block is lower than the target gas price, the base fee decreases.

• In addition to the basic fee, there can also be a reward fee (tip). During congestion, tips are used to incentivize miners to pack user transactions into blocks. Transactions can specify a base fee and an upper bound for the tip. The proposal also includes transitional options. At the beginning, half of the blocks retain the original bidding mechanism, half adopt the new fee mechanism, and gradually transition to the new scheme.

Here are a few key points:

• fee structure

cost flow

The basic fee will be destroyed and cannot be obtained by miners; the income of miners is mainly new block rewards + tips

elastic block

• Scalable blocks are used to cope with network congestion, and the base fee is also adjusted according to the congestion situation.

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• Why engage in EIP-1559?

bidding inefficiency

• safety

Minimum bids on Ethereum can vary wildly. This leads to inefficient bidding. Users choose the fee cap for bids when they send transactions, and miners choose the transaction with the highest bid. For users, it is difficult to predict how much is appropriate to bid. Even if there is a complex cost estimation algorithm, it is impossible to make a good estimate, and overpayment often occurs.

cause delay

Due to the limitation of the gas limit per block and the natural fluctuation of the transaction volume, this will cause the transaction to wait for several blocks before being packaged. For users, it may cause delays. However, EIP-1559 proposes the mechanism of elastic blocks, which can make one block larger and the next block smaller, so as to achieve a longer-term average block size limit and allow certain size differences between different blocks. This solves the current situation where some blocks are overfilled and some blocks are underused.

safety

With decreasing block rewards (like Bitcoin and Zcash), future transaction fees become the main source of rewarding miners. Therefore, there needs to be a sufficient transaction scale to support the security of the network, and it may also lead to problems such as selfish mining of miners, resulting in some unstable factors.

In order to solve the above problems, EIP-1559 changed the payment structure and payment flow: the transaction fee is divided into basic fee + tip, and at the same time the basic fee is destroyed, miners cannot get it, miners can get reward fees, and can also get new rewards block rewards, thereby reducing the incentives for miners to manipulate transaction fees, and giving various participants, including miners, the opportunity to benefit.

In addition, in the design of EIP-1559, when the network exceeds the target gas usage per block, the base fee will increase in the following blocks, and when the capacity is below the target gas usage, it will decrease. As a result, gas fee changes are adjusted according to demand, and the difference in fees between blocks is predictable.

This will improve the user experience. Before the implementation of EIP-1559, Ethereum used the first price auction mechanism (First Price Auctions) similar to Bitcoin. One of its shortcomings is the need for cost estimation. EIP-1559, on the other hand, enforces the same fee rate for all transactions as much as possible. What users need to decide is whether to pay the fee, without thinking too much about how much to bid. The wallet can help users predict the basic fee and automatically set a small tip fee, which reduces the manual adjustment of the gas fee for most users. Of course, it is also possible if the user manually sets the upper limit of the transaction fee, and the user can limit the maximum cost by manually setting the upper limit of the fee.

In addition to improving the user experience, it can also improve the security of Ethereum and solve problems such as economic abstraction.

The base fee changes that. The capture of basic fees means that ETH starts to capture the transaction fees of the Ethereum network, and the transaction fees depend on the transaction size on Ethereum. As the size of Ethereum transactions increases, the more fees ETH can capture.

At the same time, in the payment of Ethereum transaction fees before the implementation of EIP-1559, it is not necessary to pay with ETH. After the implementation, the basic fee is paid in ETH, which also solves the problem of "economic abstraction" discussed earlier to a certain extent. The so-called "economic abstraction" means that users can use stable coins or other tokens to pay fees. This will not only threaten the position of the native token ETH in the network, but also be detrimental to network security. EIP-1559 requires a specific amount of ETH to be consumed, which increases the difficulty of economic abstraction.

If the transaction size on Ethereum is large enough, then it can capture a large amount of base fees, which are paid in ETH and then destroyed, which will reduce the inflation rate of ETH, and may even deflate the situation (assuming issuance is lower than burning) . This is conducive to the value support of ETH.

From the perspective of security, in Bitcoin’s incentives, when the block subsidy is over, it mainly relies on transaction fees to maintain its security. How this model can be sustainable is still controversial. Ethereum, on the other hand, destroys transaction fees and encourages miners to continue operating through block rewards. This is a more flexible mechanism. Due to the destruction of transaction fees and the transfer of value to ETH, Ethereum uses ETH block rewards to subsidize miners, which provides a basis for the long-term sustainability of Ethereum security.

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Through the past period of practice, we can see that there are big problems in the value support of purely mining tokens. Some mining reward tokens, or so-called "governance tokens", have a lot of selling pressure, but the value support is not enough, which eventually leads to a decline in currency prices, a decline in incentives, and even many tokens with a death spiral.

Some leading DEXs have very good trading volume and good liquidity, and the annualized transaction fee of the agreement is also very high. The fundamentals are very good, but they also cannot support the value. Because they are also facing the situation of "digging, selling and withdrawing". The token itself is only a "governance token" and does not capture protocol value. Among the current protocol fees, most of the income is still not integrated into the tokens, but distributed directly to LPs. This means that the value growth of tokens and protocols has not reached a high degree of integration. This is why their value cannot be sustained under the current circumstances. Of course, this situation may change with the deepening of governance in the future, because governance itself can change this situation. The current governance tokens more represent the possibility of the future.

The impact of EIP-1559 on ETH is similar. ETH before the implementation of EIP-1559 did not capture the value of Ethereum network fees, which caused ETH to be completely unable to realize the support of value when the bubble burst, falling from the peak of nearly $1,500 at the time of the bubble to more than $100 at the bottom.