Interpretation of EIP-1559: make gas prices more transparent, not lower prices

EIP-1559 went live on August 5, 2021 as part of the London hard fork without any presumed fears; a chain split due to miners not forking Ethereum and including EIP-1559 as part of the fork , the price plummeted (ETH actually increased by 4%). EIP-1559 changes the way the Ethereum network fee market works; it introduces a new base fee, the burn fee, which is not paid to miners, and users can now specify the highest and preferred fees for transactions instead of gas prices .

Under EIP-1559, the transaction fee calculation formula is as follows:

Transaction fee = baseFee + min(maxFee - baseFee, priorityFee)

• baseFee: A floating fee based on network congestion and the latest value (for block space), which can be obtained by calling eth_feeHistory via a new JSON RPC

• priorityFee (also known as tip, miner tip): the fee used to attract block producers to participate in the transaction

• maxFee: The highest network fee the user is willing to pay.

EIP-1559 did not appear out of thin air, it was designed and implemented to solve some major problems in the Ethereum network. But before that, let's go back to the beginning: what is EIP-1559?

EIP-1559 (Ethereum Improvement Proposals 1559), proposed by Vitalik Buterin in 2019, describes changes in the Ethereum fee model. It is defined as a transaction pricing mechanism consisting of a fixed per-block network fee that is burned and dynamically scaled/contracted block sizes to handle transient congestion.

To fully understand the above, we must first look at what Ethereum's fee model was prior to EIP-1559; a simple auction mechanism, also known as a first-price auction. In this first-price auction model, users who want miners to resolve their transactions must bid to have their transactions included in a block. This is done by submitting the gas price they are willing to pay for a particular transaction. These miners are incentivized to sort transactions by the highest gas price and include the most profitable transactions in blocks first. Users with lower gas prices will have to wait a long time for their transactions to be included in a block. This often results in users overpaying to have their transactions included in a block. This is very inefficient and not ideal for user experience.

EIP-1559 comes to the rescue with the following goals:

• Make transaction fees more predictable: Before EIP-1559, Ethereum transaction fees were market-driven, i.e. the gas price/fee determined how quickly miners included transactions in blocks. In the past, during ICOs, network upgrades, or NFT booms, the network was highly active and it was difficult for network users and wallets to predict gas fees. This either results in too high a payment to be included in a block, or too low a payment and a long wait for a transaction to be included in a block, neither of which is ideal. EIP-1559 is sold at a fixed price instead of gas fees. Now, the person submitting the transaction no longer needs to guess how much gas is required, as there will be a clear "base fee" to get included in the next block and a tip to pay the miner. For users or applications that wish to prioritize transactions, more hints can be added to encourage miners to prioritize transactions. The base fee will be "burned", meaning destroyed, and the tip will go to the miner. Wallets like MetaMask also take advantage of this to make better estimates, since the baseFee is managed by the protocol itself, so there is no need to rely as much on external oracles.

The system also reverts to tipped first-price auctions if demand spikes due to high network activity (e.g. NFT drops), however, since it is obvious when the spike ends and prices recede more quickly, this may be the next within a few blocks (may take several minutes). The idea is to make fees based on block requirements more transparent to users.

• Reduce transaction confirmation delays: Pre-EIP-1559, transaction delays are due to blocks being always full; above are transactions with the highest paying since the last block. If a transaction is included in a block, it must pay a higher gas fee. If it doesn't pay a higher gas fee and therefore isn't immediately included in a block, it's hard to estimate when it will be included in a block. After EIP -1559, blocks can be 200% full, i.e. blocks with twice the gasLimit will be valid regardless of the gasLimit set by the block. For example, if a block's gas limit is set to 10m gas, then a block with a maximum of 20m gas will be valid. This means that in most cases, blocks will have an additional 100% capacity and can still be filled with transactions. Therefore, as long as the transaction is sent with a fee higher than the baseFee and includes a miner tip (priorityFee), it will be included in the next few blocks. The difference between maxFee and baseFee+tip will be returned to the sender of the transaction (unlike pre-EIP-1559).

• Creates a positive feedback loop between network activity and network supply: EIP-1559 allows network capacity to be increased by changing the maxGas limit per block from 12.5 million gas to 25 million gas, which is double the block size. With baseFee and increased network capacity, EIP-1559 can be the following logic, when the network utilization exceeds 50%, the base fee increases, and when the network utilization is lower than 50%, the base fee decreases. This means that the network aims to reach an equilibrium of 50% capacity by adjusting fees accordingly based on network utilization.

• Create deflationary pressure: Under EIP-1559, base fees are part of every transaction. The base fee rises and falls with the demand for block space. During periods of sustained high demand for block space, base fees rise, putting deflationary pressure on the supply of ETH. Burning the baseFee creates an interesting feedback loop between network users and ETH supply. More network activity means more ETH is burned and less ETH can be sold in the market by miners, which makes the ETH already in existence more valuable. Burning the base fee is basically a reward for network users by making their ETH more scarce and thus more valuable, rather than paying exorbitant prices to miners.

This article comes from the decentralized financial community and is reproduced with authorization.

Source：https://medium.com/coinmonks/why-eip-1559-is-important-5c24d592eace

This article comes from the decentralized financial community and is reproduced with authorization.