Dissecting EIP-1559

Welcome to our article on EIP-1559, a proposal on improving the current transaction fee model for the Ethereum network.

Welcome to our article on EIP-1559, a proposal on improving the current transaction fee model for the Ethereum network.

Key Takeaways

• The Ethereum network currently allocates computing resources to transactions with a first-price auction method: Transaction senders submit their bids to compete for the computing resources, and the sender who submits the highest bid wins and pays his or her bidding price.
• The first-price auction tends to suffer economic inefficiency and suboptimality. Whether a sender can win or gain the most highly depends on other competitors’ valuations and strategies. It also contributes to the volatility of the transaction fees on the network.
• The EIP-1559 proposal aims at mitigating the above economic defects and improving the user experience. The bidding method and fixed block size in the current model are replaced by a compulsory base fee and an optional tip, and variable block size. The new model can attain economic efficiency easier than before, and potentially mitigate the volatility in transaction fees.
• The new model cannot significantly reduce the transaction fees on its own, since they are determined by the demand and supply, which cannot be substantially altered by an improvement in the allocation design.
• As the base fee would be burnt, the new model could bring deflation to Ether. This might also slash the revenues earned by miners, as the base fees are destroyed instead of paying to them.

Read the full version of the Dissecting EIP-1559 here.