Ethereum EIP-1559 Could Solve the Current GAS Crisis: An Overview

Data & Research / 21.02.2021

Since its establishment in July 2015 by Vitalik Buterin, Charles Hoskinson, and others, Ethereum has grown immensely to be the leading blockchain network regarding decentralized finance (DeFi) and smart contracts. Its native coin, Ether, is also the second most valuable cryptocurrency after Bitcoin. However, its massive growth has brought various challenges, notably network congestion due to scalability issues and exorbitant gas (transaction) fees, among other problems. 

To solve the challenges that have continued to hamper the network’s growth, Ethereum developers and the community have proposed several measures, including the transition to PoS, EIP1559, and sharding nipping these issues before they ruin the leading distributed ledger technology (DLT) project. Here, we specifically look at the EIP-1559 and how it can be the key to the GAS crisis puzzle. 

What are EIPs?

Ethereum Improvement Proposal (EIP) is a means by which Ethereum developers and the community propose or request changes to the Ethereum Network to better user experience. EIPs are quite similar to the Bitcoin Improvement Proposals (BIPs) and are usually design documents containing the proposed change’s technical specifications and their basis. 

Most of the EIPs usually focus on enhancing the technical aspects of the Ethereum blockchain. EIP-1559 is a unique EIP since it proposes a critical change in the Ethereum monetary policy and the supporting applications such as wallets. Also, unlike other EIPs, the EIP-1559 has widely been discussed outside the Ethereum developers’ community’s confines, pointing to the proposal’s criticality. 

Ethereum Current Gas Model

Ethereuem’s current Gas model is based on a simple auction mechanism. The auction-mechanism is also referred to as the first-price auction and involves everyone on the network submitting their bid (gas price) for the amount they are willing to pay to have their transaction picked and verified by a miner. Typically, miners pick transactions ranked by the highest fees resulting in many traders grossly overpaying since they do not know what others are bidding. Therefore, traders make high bids since the higher you pay, the faster the miners can pick your transactions. For instance, in June 2020, an Ethereum user paid a whopping $2 600,000 fee for sending just $130 worth of ETH: the fee amounted to roughly 2,000,000% more than the transaction itself. 

During a sudden surge in transactions, users start to bid highly, leading to an ultimate increase in the transaction fees. Users who bid a lower transaction fee remain in “pending” until all the transactions are processed, then the backlog gets processed. As you can conclude, this is discriminatory and unsustainable, resulting in users overpaying for their transactions. Besides, this model fails to factor in demand since it assumes the transaction fees would be the same regardless of the surge in transactions. 

The three major problems with the current Ethereum Gas model are:  

  • Instability of blockchains with no block rewards 
  • The price auction mechanism is highly inefficient and requires complex fee estimation algorithms that don’t work correctly, causing frequent fee overpayment. 
  • The current gas model creates a mismatch between the volatility of transaction fee levels and the social cost of transactions. On the Ethereum network, minimum fees are typically around 2 gwei (10^9 gwei = 1 ETH), but sometimes go up to 20-50 gwei and have even gone up on one occasion to over 200 gwei during high demand. This creates many inefficiencies.

EIP-1559 Explained

The EIP-1559 is a 2018 Ethereum Improvement Proposal by Ethereum co-founder Vitalik Buterin to solve the current gas model’s challenges by replacing the current “first-price auction” fee model with a “BASEFEE” system which is more predictable and cost-efficient. As such, the transaction fees on the network would be dynamically adjusted based on network load and demand, enabling wallets and protocols to set lower and more accurate gas fees automatically. 

The main idea behind EIP-1559 is to introduce a base fee (BASEFEE), which basically represents the minimum fee that has to be paid for a transaction to be included in a block. The BASEFEE amount can be adjusted depending on the congestion in the network. To enable this, the network capacity would be increased from 8 million to 16 million gas so that 50% utilization matches up with the current 8 million gas limit. 

The logic is that when the network is at >50% capacity, the BASEFEE is adjusted slightly up, and when capacity is at <50%, it’s lowered slightly down. In essence, the Ethereum blockchain seeks to achieve equilibrium at 50% capacity by adjusting fees based on network usage demand. Since these increments are predetermined, users can calculate the maximum difference in BASEFEE from block to block and avoid paying exorbitant transaction fees. When the BASEFEE is implemented, users will not be required to manually set gas fees, even during high network demand periods.     

The proposal also suggests introducing a miner tip where miners can be paid directly to prioritize a transaction. Additionally, the BASEFEE is always burned (destroyed automatically on the network) to prevent miners from influencing the transaction fee to extract more users’ fees. Burning BASEFEE will also ensure that only ETH can be used to pay for transactions on the network, further reinforcing the economic value of ETH in the crypto space. 

Implications on the Ethereum Network

The implementation of EIP-1559 will have several implications on the Ethereum Network, both positive and negative. 

Positive Implications

  • Enhance the user experience by automating the fee bidding system and providing a predictable fee system for advanced users. 
  • Allow users to tip miners and have their transactions confirmed in time during network congestion. 
  • Reinforce the economic value of ETH via the fee burning mechanism, which is deflationary. 

Negative Implications

The implementation of EIP 1559 will result in less profit for miners. Currently, ETH miners receive both the block subsidy reward coupled with the entire gas fee. Following the implementation of the proposal, miners will only receive the block reward and the miner tip. As a result, Ethereum miners led by the three largest mining pools-BitFly, F2Pool, and Sparkpool are either against EIP-1559 implementation or want it to be delayed due to loss of mining revenue.

Burning the base fee could also easily translate to losing control over the long-term monetary policy of Ethereum, making the platform alternate between being inflationary and deflationary.

State of EIP-1559

EIP 1559 is among the Core category of EIPs, meaning that the change affects the entire Ethereum consensus and necessitates a hard fork. However, the Ethereum development team has hinted that the EIP-1559 upgrade is entirely independent of the transition to Proof-of-Stake consensus, i.e., Ethereum 2.0. It’s reported that developers are continuing to work on the proposal with a recent update from ConsenSys developer Tim Beiko affirming that large-state testing is underway: “We set up a testnet with 100 million accounts and 100 million storage slots and synced 4 Besu + 4 Geth nodes on it, along with a Besu mining node.”

 There have been increased preparations for the next major network upgrade, dubbed Berlin, which will usher in several other EIPs, including the EIP-1559.  The estimated timeframe for implementing the EIP 1559 proposal is expected towards the end of 2021 and should be in the Ethereum Mainnet by February 2022.     

Closing Words

The increase of transactions on the Ethereum network up to 1 million transactions per day has seen the platform’s GAS crisis deteriorate, with transaction fees reaching a high of $21.15. It’s no brainer that the current auction-mechanism fee model is unsustainable and exposes users to miners’ immense Gas exploitation. To solve Ethereuem’s gas management crisis, EIP-1155 proposes a “long-term average target” (10 million) and a “hard per-block cap” (20 million). Additionally, there is an adjustable BASEFEE integrating a targeting mechanism to keep block Gas limits at 10 million Gwei.

There will also be a small tip for miners. This price model overhauls the first auction price, where the miner has the liberty to pick the highest bid for inclusion in the next block, preventing miners from attempting to extract even more fees from network users. If successfully implemented, the proposal will significantly benefit Ethereum users in predicting transaction fees, potentially lower transaction fees, and quick transactions. Additionally, a portion of ETH will be burned with every transaction sending.  

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Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.