The Ethereum 1559 upgrade is approaching, is it possible to restart the bull market by relying on deflation?

特邀专栏作者

2021-07-05 11:16 (UTC+8)

This article is about 6623 words, reading the full article takes about 10 minutes

The value determines the price. If the value of Ethereum wants to achieve a qualitative improvement, it still needs to hope to increase the throughput of the network, and the impact of supply and demand on the price is only a short-term effect.

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Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

Wu Shuo Author | Wu Zhuocheng

Editor of this issue | Colin Wu

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1 Design principle

The essence of the blockchain is a series of ledgers. In a decentralized world, no one is obliged to keep accounts for users. The work of linking accounts and ledgers needs to be completed by miners participating in mining. Mining is not only accounting, but also a guarantee for the safety of the ecological chain. A network with insufficient computing power is extremely vulnerable to 51% computing power attacks, and security issues will be threatened. Therefore, the user's payment mechanism and the miner's income mechanism determine the efficiency and security of the entire block network. When users pay too much, the number of users participating in transactions on the chain will decrease, resulting in waste of block space and reducing the value of the entire network; and when the income of miners is too low, the computing power invested in mining will be reduced, and the network’s Security is difficult to guarantee.

Therefore, the setting of transaction fees is a process of supply and demand balance. Miners are the supply side, users are the demand side, and commodities are objects called Gas in the Ethereum network, which can be understood as the workload required for each transaction. For example, the most basic work, that is, a simple transfer, costs 21,000 units of Gas, while the more complex work, such as the execution of a smart contract, requires more Gas. Of course, the size of Gas that can be accommodated in a block is not unlimited. This limit is called the Gas limit, which is voted by miners. The most recent adjustment was proposed by Vitalik on April 23. Although it was opposed by some miners, it was finally increased from 12.5 million to 15 million, thereby alleviating network congestion caused by increased activity on the chain.

Here we need to explain why the miners object, which helps to understand the role of the 1559 agreement. Before the miners keep accounts, the blockchain network will publish an encrypted block, and the miners will decrypt the algorithm after receiving the news of the block release, and the miners who solve the puzzle first will get the bookkeeping rights of this block , the Ethereum algorithm will give a fixed block reward for this. So how do miners keep accounts? Abstractly speaking, the miners who have dug up this block will "package" some information waiting for confirmation in the memory pool and fill it into the block, and then put it into the blockchain network for transmission. Therefore, the smaller the block size, the less information is packaged each time. Rare things are more expensive, users must pay higher rewards in order to be packaged as soon as possible, and miners can benefit from it, which is why miners are reluctant to increase the gas limit.

Since miners tend to create scarcity, why did the proposal finally pass? The reason is that with the rapid increase of Ethereum users, the supply of block space is seriously in short supply, so that even if the Gas limit is increased, users still need to bid high prices to compete for the limited space. The following supply and demand curve can explain this phenomenon well:

Among them, D1 is the Gas demand curve before expansion, and D2 is the demand line after expansion; the supply line is the same. It is not difficult to see that with the increase of the Gas upper limit, the demand curve will shift to the left under the premise that the number of users does not increase, and the Gas fee will decrease accordingly. However, due to the increase in the number of Gas, the transaction fees received by miners will not decrease. Not only that, but in fact, due to the continuous increase in the number of users, the user's demand for Gas has not decreased due to the increase in the Gas limit, so the Gas price has not decreased but increased.

It should be noted that the amount of supply involved here (same reason below) refers to the amount of work miners are willing to pay for packaging information, not the size of the block. The block size is fixed at the Gas limit (actually slightly fluctuating), and is not affected by the miners' computing power; similarly, the block generation time is only affected by the difficulty of decryption, and the Ethereum algorithm will automatically adjust the difficulty according to the computing power invested by the miners to achieve an average 13 seconds to produce a block speed. Therefore, what is really controlled by the miners is the bookkeeping power, that is, the miners can choose not to pack any content, but only pass an empty block out. This is also the biggest game advantage of miners behind the 1559 agreement.

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2 What is the EIP-1559 protocol

The biggest change of EIP-1559 is to split the original transaction fee into base fee and tip. Among them, the base fee is the fee that the user must pay, and the amount is determined by the utilization rate of the previous block, not by the user's auction. For this reason, the 1559 protocol also deliberately changed the upper limit of the block space, from the previous 15 million to 30 million, but still set the target size of 15 million. The intention of this design is to maintain the block utilization rate at 50% to facilitate the calculation of the base fee. When the block utilization rate exceeds 50%, the system will automatically increase the base fee; and vice versa. The specific calculation is as follows:Among them, b0 is the base fee of the previous block, and s0 is the utilization rate of the previous block. Through calculation, we can find that when there are 39 consecutive block utilization rates close to 100%, the base fee will be expanded to 99 times (1.125^39). In other words, if the initial base fee is 10Gwei, the fee will exceed 1000Gwei in less than nine minutes. Obviously, users cannot bear such a high transaction fee, so as the base fee increases, the amount of information on the chain will decrease, and after several blocks with a utilization rate of less than 50% appear, the base fee will also drop. In this way, the protocol can maintain blocks in a "half-full" state.Therefore, if you want to ensure that the information is packaged immediately, the user must pay some additional tips on the basis of the base fee, that is, tip. Different from the base fee, the tip size is determined by the user, and the decision method is still the first price auction, that is, the higher the tip, the more likely it will be packaged immediately.

Also, the tip will be paid directly to the miners, while the base fee will be destroyed

. For example, suppose the base fee of the current block is 100Gwei, and the fee limit set by the user is 200Gwei+5Gwei, which means that the user is willing to pay a base fee of 200Gwei at most (in case the current block cannot be packaged and the base fee of the next block increases) At the same time, they are also willing to pay the miners 5Gwei tip, and the final payment is 105Gwei. Here we need to explain why the base fee must be destroyed. Otherwise, miners will conduct frequent small transactions on the network, resulting in a high block utilization rate, and the base fee will explode exponentially.

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3 Impact on the Ethereum network

The EIP-1559 protocol was proposed and led by Vitalik Buterin and Eric Conner. Eric Conner elaborated on the motivation and advantages of the protocol on Medium, and believes that the transaction fee mechanism can bring the Ethereum network and its users the following benefit:

a) Save up to 90% of transaction costs

b) Improve user experience by automating the transaction fee bidding system

c) Provide users with a predictable transaction fee system

d) Reduce the expected waiting time for confirming transactions

e) Even though transaction fees are the main source of rewards, this approach inhibits selfish mining

f) Allow users to "jump in line" even when the network is congested

g) Consolidate the economic value of ETH at the protocol level

a) Substantial reduction in transaction fees

b) Significantly reduce the volatility of transaction fees, making transaction fees predictable

As for the last two: Allowing "queue jumping" has existed since ancient times. It is nothing more than continuously increasing the tip, which is no different from the current first-price auction; and increasing the value of ETH is an incidental benefit. If the first five items can be realized, then The value of the entire ecosystem will naturally increase, which can be understood as the final manifestation of all the above advantages. The following two visions are analyzed to explore their feasibility.

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3.1 Whether to significantly reduce transaction fees

Through the interpretation of the transaction fee mechanism, it is not difficult to find that when the transaction is congested, the tip under the 1559 protocol is actually the same as the existing transaction fee. Users with urgent transaction needs must pay a tip to compete for the limited space. At this time, the protocol It is equivalent to returning to the existing first-price auction mode. It’s just that a part of the admission fee—the base fee—must be paid before the auction, so the design of this fee is equivalent to adding a tax on the basis of the existing fee. In a centralized world, taxes are owned by the state, but in a blockchain world, there is no central authority, and this part of the fee can only be destroyed.

As shown in the figure above, we do not consider the shift of the demand curve due to changes in the number of users. Assuming that the number of users remains unchanged, the demand curve D will remain unchanged. It is necessary to explain here that under the 1559 agreement, it is impossible for the supply and demand curve to intersect the vertical part of the supply line for a long time, because that means that the block utilization rate is always at 100%, which will cause the base fee to rise exponentially, so In the long run, the equilibrium point of the supply and demand curve will remain in the slanted part.

With the emergence of taxation, the expected income of producers decreases, the supply curve will shift from S1 to S2 to the left, and the upper limit of gas supply remains unchanged. At this time, the equilibrium price rises from the original P1 to P2, so the actual fee paid by the user not only does not fall but rises, resulting in a decrease in consumer surplus (the yellow part in the figure). At the same time, the miner's producer surplus (the green part in the figure) also decreases, because the actual fee received by the miner is only P*. The blue part is the destroyed base fee, which is the same as the tax, and the ultimate beneficiary of this part of the income is all those who hold ETH. Because after the base fee is destroyed, the ETH inflation rate will drop, and even deflation will occur in the case of network congestion (when the base fee is greater than the block reward), so the price will rise. The red part is called deadweight loss in economics, which refers to the social cost caused by the market not being in an optimal operating state, and the direct impact is the decline of the total market production—Q1 Gas could have been produced and sold , but only sold Q2 in the end, that is to say, some people were unable to complete the transaction because the transaction fee they were willing to pay was lower than the base fee, so they had no way to enjoy the benefits of the transaction. From this, it can be judged that the 1559 protocol cannot reduce the transaction fee, nor can it solve the problem of network congestion. It just makes the network less congested by realizing off-peak transactions.

In fact, including the 1559 protocol, it is impossible for any transaction fee mechanism to significantly reduce transaction fees. The reason is that transaction fees are determined by market supply and demand. The high transaction fees caused by the congestion of the Ethereum network are essentially It is a scalability issue, not a transaction fee mechanism issue. If the network throughput cannot be fundamentally expanded, then peak-shifting transactions can only play a temporary role in diverting traffic during peak periods, and the price paid for this is a decline in transaction volume. Of course, the premise of the decline in transaction volume is that we do not consider changes in the number of users. In fact, as the number of network participants increases day by day, the number of users will continue to rise in the long run. This will cause the demand curve to shift to the right and the transaction price will further increase. Not only that, due to the deflation of ETH and the increase in the price of legal currency, the actual transaction fee paid by users may be higher than the theoretical value.

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Finally, this paper discusses a question, whether the 1559 protocol can greatly reduce the fluctuation of transaction fees and make transaction fees predictable? Intuitively, it is feasible, because the base fee can be predicted by the utilization rate of the previous block; although the tip cannot be predicted, with the realization of off-peak transactions, the number of users competing in the same block will decrease, and the total fee should be controllable. In addition, the expected waiting time for the completion of packaging will also be shortened. It should be noted here that it is the expected waiting time rather than the waiting time. Because of the existence of the base fee, the user already knows the minimum price before paying. If it is unacceptable, just wait for the base fee to drop. The same is waiting, the difference is that the waiting time under the 1559 agreement is predictable, while the waiting under the current agreement is boundless. It's like a besieged army. If they know that reinforcements will arrive for up to five days, their morale will definitely be boosted; but if they cannot communicate with the reinforcements, they may collapse on the third day. Therefore, the volatility of transaction fees and the expected waiting time for package completion will be greatly reduced.

However, this is only in routine cases. Imagine an extreme situation: when the base fee is extremely low, the demand for transactions suddenly increases sharply. Since the increase of the base fee is limited each time, it cannot be greatly increased in a short period of time (for example, within 20 blocks). Users want to complete the transaction as soon as possible. You will pay a high tip, and at this time the transaction fee and waiting time become unpredictable again. Many studies have given evidence in this regard. Leonardos, S. et al. (2021) concluded that the rise and fall of the base fee determines the degree of confusion in transaction fees. The closer the rise and fall is to 12.5%, the more dynamic the base fee will be. The weaker the adjustment function, in extreme cases, the adjustment ability will be lost. Moore, IC et al. (2021) found through stochastic process simulation that we cannot reject the assumption that the mid- to long-term (more than 4 days) trend of transaction fees is an unsteady process.

All in all, in the absence of extreme events, the 1559 agreement can indeed reduce the fluctuation of transaction fees; and in the short term, transaction fees will fluctuate according to a certain trend, so it can be roughly predicted, but there is no prediction in the medium and long term feasibility.

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4 Summary

Let's go back and analyze Eric Conner's vision for the EIP-1559 protocol one by one:

a) Save up to 90% of transaction costs

In fact, not only has it not been reduced, but users may pay higher transaction fees, because although the base fee is a tax collected from miners, miners will pass part of the tax effect on to users through the invisible hands of the market. Why is it possible, because users can choose to trade at their leisure to avoid high transaction fees, which will be explained in detail at the end of the article.

b) Improve user experience by automating the transaction fee bidding system

It can be realized because the base fee can be calculated automatically. When the 1559 protocol is launched, the wallet will update the corresponding functions.

c) Provide users with a predictable transaction fee system

It is predictable in the short term, but unpredictable in the medium and long term (more than 4 days).

d) Reduce the expected waiting time for confirming transactions

The user's expected waiting time can be reduced, but the actual waiting time has not changed, because the transaction volume has not changed, and the throughput has not changed.

e) Even though transaction fees are the main source of rewards, this approach inhibits selfish mining

can be realised. Miners will not artificially create congestion, because they will have to pay a large amount of base fees, and these fees will be destroyed; but miners will not launch empty block attacks because of the destruction of income, because there are still tips to collect after all. In fact, since the sharp drop on 5.19, on-chain transaction fees have dropped sharply, and the gas price has remained roughly below 50Gwei. This means that even if the block utilization rate is 100%, the transaction fee reward for a block is only 0.75 ETH, accounting for less than 30% of the overall revenue. Therefore, the miners' income on the currency standard has not dropped significantly, but with the appreciation of ETH, they can obtain more income on the gold standard.

f) Allow users to "jump in line" even when the network is congested

g) Consolidate the economic value of ETH at the protocol level