EIP-1559 is an Ethereum Improvement Proposal created to optimize the fee market system of the Ethereum blockchain.
The EIP — activated in the London hard fork upgrade on Aug. 5th, 2021 — will change the way Ethereum gas fees are calculated and in doing so streamline transaction UX, improve ETH’s economics, and boost the security of Ethereum in general.
The origins of EIP-1559
Influenced by earlier research by Ethereum co-creator Vitalik Buterin and EthHub co-founder Eric Conner, EIP-1559 was formally proposed by Buterin, Conner, and a handful of other Ethereum core developers in April 2019.
The EIP was authored to address inefficiencies around Ethereum’s simply legacy “first-price auction” fee system, namely fee overpayments, fee volatility, and transaction delays.
To transcend these inefficiencies, EIP-1559’s authors specifically proposed implementing a new “fixed-per-block” fee system with dynamic block sizes and a fee-burning mechanism. For over two years, EIP-1559 was discussed, researched, and tested around the Ethereum community until core developers finally approved the EIP for inclusion in Ethereum’s then-upcoming London upgrade in March 2021.
How EIP-1559 works
Ethereum’s legacy fee market often leads to an Ethereum block getting filled with transactions from the highest-bidding transactors since the prior block. This format causes unnecessary upward bidding pressure and uncertainty around ETH gas prices and transaction times.
To transcend these shortcomings, EIP-1559 introduces a new fee system with three key elements: the base fee, the tip, and the fee cap.
Set by Ethereum, the base fee indicates the minimum amount of gas that must be used for a transaction to be included in an Ethereum block.
If a transactor sets their fee cap (see below) to higher than the base fee and adds a tip for miners (and next validators), they can reasonably assume their transaction will be confirmed in the following series of blocks. This dynamic is in contrast to the current legacy fee system, in which a user could fire off a transaction and then conditions change so fast that the transaction won’t confirm for hours.
Notably, base fees are burnt (i.e. destroyed), which if demand for Ethereum blockspace permits could lead to ETH becoming a deflationary asset in the future.
Set by users, the tip is added to transactions to compensate miners/ validators for their risks, like mining uncle blocks. This tip also offers transactors the ability to pay a premium over the base fee to have their transactions mined/validated even faster. Accordingly, when Ethereum blocks get 100% full now the tip lets users temporarily revert to the legacy “first-price auction” system to complete their transactions.
Image via David Hoffman.
Set by users, the fee cap indicates the maximum amount of gas an Ethereum transactor is willing to pay for a transaction. The fee cap includes the base fee and the tip, and when a transaction gets confirmed the transactor receives a refund as the difference between what’s actually spent and the proposed fee cap. Simply put, then, the fee cap – (base fee + the tip) = the refund. This system ensures a user never pays more gas than they are willing to in order to get a transaction included in an Ethereum block.
Recap: what gets burned vs. paid out
- Under EIP-1559, miners/validators get paid block rewards + tips.
- All accrued base fees get burned.
- Users set their own fee caps and tips, while the base fee is decided by the protocol per demand.
- EIP-1559 will still be able to facilitate legacy style transactions. When these transactions come in their gas prices are simply converted into fee caps, including respective base fees and tips.
The advantages of EIP-1559
As previously mentioned, the activation of EIP-1559 offers three fundamental advances: improved Ethereum transaction UX, improved ETH economics, and improved Ethereum security.
EIP-1559 makes the gas price of Ethereum transactions explicit on the protocol level, thus mitigating much of the uncertainty around gas and Ethereum transaction times.
One of the main ways EIP-1559 accomplishes these mitigations is by allowing blocks to become 200% full, i.e. filled up to double whatever the reigning Ethereum gas limit is. This extra flexibility will grant Ethereum better capacity to support transaction demand, leading to shorter transaction wait times and clearer gas price estimations.
Image via Finematics.
Improved ETH economics
EIP-1559 mandates all base fees be paid in ETH, whereas the legacy fee system actually doesn’t specify that gas must be paid in ETH.
That legacy dynamic left room for the possibility of economic abstraction, i.e. ETH losing its central importance within the Ethereum network. EIP-1559 mitigates such abstraction by allowing base fees to be paid only in ETH, thus consolidating ETH’s economic position.
Additionally, if demand for Ethereum block space continues to remain high or grow from here, base fee burning could veer ETH from an inflationary asset into a deflationary asset with a steadily dwindling supply.
Improved Ethereum security
EIP-1559 also advances Ethereum’s security in various ways. For starters, EIP-1559 helps prevent spam attacks against the Ethereum network
Previously an attacker could theoretically attempt to spam Ethereum for below-market gas costs by colluding with miners. EIP-1559 ensures such a spammer couldn’t ever pay lower than the base fee to launch an attack, and thus this attack would even get costlier over time as the culprit steadily drives up the base fee on themselves.
Moreover, EIP-1559 can help prevent small reorganizations, or reorgs, of Ethereum.
Reorgs can happen non-maliciously due to the nature of decentralized blockchain consensus, but they can also be crafted and performed as attacks for a malicious agent’s benefit. As Ethereum’s legacy “gas wars” led to blocks filled with huge payloads of transaction fees, miners had non-trivial incentives to perform small blockchain reorgs. In contrast EIP-1559 burns base fees, leading to smaller attack incentives.
The big picture
The activation of EIP-1559 marks a major milestone for the Ethereum ecosystem. Not only does the system improve Ethereum’s fee market UX, it’s also the latest high-profile reminder that the Ethereum community is capable of high-quality, grassroots-driven, and multi-year research and development (R&D) efforts.
For now, the grand question is how soon could ETH become deflationary from EIP-1559 fee burning. The short answer is no one knows currently. The precise answer is that ETH becomes deflationary whenever the amount of ETH fees burned daily exceeds the amount of ETH distributed to miners/validators via block rewards, since at that point more ETH will be getting destroyed than is being created.