Stable fees and Burning Eth. Ethereum’s EIP-1559 Explained.
One of the biggest short-term roadblocks facing wider acceptance of decentralized finance and crypto, in general, is the unpredictable and frequently expensive fees associated with doing anything more than moving your coins around. DeFi has gone through two distinct hype cycles in the past six months, first last summer and again in February, where usage shot up, volume was way above normal, and in-kind, Ethereum gas fees skyrocketed. These high fees threw the breaks on the DeFi hype pretty quickly since it does not differentiate the fees based on how much you’re sending. An average user participating with only a couple hundred dollars worth of crypto faced the same fees as someone moving millions. This made even just swapping tokens on Uniswap nonviable for most people, let alone interacting with more complex smart contracts like Aave or Compound. While Ethereum is currently making the transition to Eth 2.0 and proof-of-stake, that won’t realistically be live for another two years, if there are no delays.
There are other projects like Loopring and Polygon (formally Matic Network) that are building layer-2 solutions that make transactions off-chain and thus have nearly no fees, but the Ethereum community itself is actively attempting to solve this as well. A step in the right direction is the recently passed Ethereum Improvement Proposal (EIP) 1559, which is planned to be implemented in July. The biggest feature of this change is the introduction of a “base fee,” which is automatically set by the Ethereum protocol based on usage and demand, aiming for 50% network utilization and drifting up or down to meet that goal.
This allows for more stable gas fees as we will always know what the base fee currently is. This differs from the current “auction-style” fees, where users are forced to outbid each other for their transaction to be included in the block. While this change may not reduce gas fees, it will certainly make it easier to predict. On top of this, the base fee is destroyed, or burned when each block is added. Burning the coins gets rid of them forever, which allows the potential for ETH to be deflationary even as new coins are created in the block rewards. At the previous heights of DeFi usage, this would have been the case, and many believe this will create upward pressure on the price of ETH.
Not everyone in the community is happy about this. With the current model, miners were making huge profits during Ethereum’s busiest times, and to them, this implementation takes away a lot of their incentive. However, users can still add a miner “tip” to their transactions to speed them up and burning the base fee encourages everyone to hold Ethereum rather than selling the block rewards for profit. Nonetheless, several mining groups have planned protests against the proposal and driving community discussion for an accelerated move to proof-of-stake.
Ultimately, EIP-1559 will help people and institutions better predict how much they’ll need to spend to commit a transaction and how long that transaction will take. No more uncertainty if/when your transaction will go through if you set the gas too low during a demand spike. Clarifying the how much and how long is crucial for wider acceptance and institutional involvement. The Ethereum, DeFi, and crypto community as a whole should be excited for this big step on the road to adoption.
Thanks for reading. Cheers!
Disclaimer: This is not financial advice. The information provided is for reference and informational purposes only. Please do your own research always to verify the facts.
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Stable fees and Burning Eth. Ethereum’s EIP-1559 and its Impact. was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.