- The demand for transactions on the Ethereum blockchain has brought fees to uncomfortable levels.
- A new technical proposal helps cope with high fees by implementing a dynamic pricing system.
- Referred to as EIP 1559, Ethereum users would now pay a set “base fee” to the network as well as a tip to miners.
- One tech observer calls it “the biggest change to a blockchain since it was released”.
The cost of using Ethereum has increased by around 500% since April. This is not very helpful for people who run programs on it.
And while average gas charges are not at the all-time high of July 2018, the problem needs to be addressed if decentralized applications (dapps) can run reliably on the world’s leading blockchain for smart contracts.
However, a potential tech savior is in sight – and it’s not the Eth 2.0 overhaul or rollups, the latest modern scaling solution.
Read more: Vitalik Buterin shares comments on the expected Eth 2.0 launch date
This proposed update, dubbed the Ethereum Improvement Proposal (EIP) 1559, aims to reduce transaction costs by overhauling the network’s fee market in what independent analyst Hasu calls “the biggest change to a blockchain after its release” designated.
Some Ethereum clients, the teams that manage the blockchain software in different programming languages, are already working on implementations.
EIP 1559, launched in April 2019, has its roots in an August 2018 paper on the Ethereum price auction model, authored by Ethereum co-founder Vitalik Buterin. The EIP itself was written by Buterin together with Ethereum developers Eric Conner, Rick Dudley, Matthew Slipper and Ian Norden.
According to Barnabé Monnot, researcher at the Ethereum Foundation, the EIP 1559 is trying to solve the fee pressure by implementing “algorithmic pricing”.
The EIP solves two problems at the same time by dynamically changing the size of the blocks depending on the number of transactions in the queue between certain thresholds and pricing certain users out when the demand becomes too high.
This is done in two parts: a basic burned fee (BASEFEE) for transactions and a tip to miners.
The base fee will be at a set level depending on the network conditions, while the tip can compensate miners for their work and increase it to “skip” the transaction line – a nice feature of current blockchain networks that helps reduce congestion .
Think of it like a regulated freeway that can open and close lanes as needed. There is also a fast lane that someone can pay for if they need to scoot in an emergency.
The configuration also helps in bottlenecks in which it is almost impossible to process a transaction. So far this has happened twice: once with the rise of CryptoKitties in 2017 and more recently on March 12th (or “Black Thursday”) when the price of ether (ETH) fell by more than 30% within 24 hours, resulting in a surge in Mad Dash for killing various Ethereum-based applications.
Not everyone wants to throw the baby out with the bath water. Etheruem has a fee problem, but that doesn’t mean you have to completely drain the current model.
EIP 2593, written by MetaMask developer Dan Finlay, proposes an “escalator algorithm” that users can use to modify their fee structure based on their relative needs. In short, the EIP allows a user to set a transaction fee to the lowest possible amount by slowly increasing the transaction fee until a miner decides to add it to the next block. (A more complete breakdown of the pros and cons of EIP 2593 can be found here.)
Ethereum’s developers liked the idea – so much that the EIP will likely be used in addition to the EIP 1559 to streamline its “tip” function. Starting June 24th, developers have decided to start a testnet to model the effects of EIP 1559 and other tangential work on the network.
As Hasu, the pseudonymous blockchain researcher, notes, these effects could be far-reaching.
While miners are currently rewarded at ETH for processing transactions via a block reward and a transaction fee, the designation of this fee is by no means specific to ETH. For example, a team could reach a mining pool and pay them in fiat to route their orders first.
In particular, EIP 1559 forces Ethereum transactions to be paid for in the native token of the blockchain. The basic fee is based on the ETH, is paid to the network and burned with every transaction, which in the long term also reduces the outstanding ether supply.
(At some point, Ethereum will stop paying mining rewards at all as soon as the network switches to the proof-of-stake [PoS] Consensus algorithm in the mother-of-all network updates known as Eth 2.0. The current network Eth 1.x will run alongside Eth 2.0 for a few years until the PoS chain is fully functional.)
Read more: The Zcash Privacy Tech That Underlies the Transition from Ethereum to Eth 2.0
Consequently, the burn also offers new deflationary pressures on Etheruem’s economic model, pressures that some claim would add a higher value proposition to the network in the long run.
“The burning of BASEFEE, which makes up most of the transaction fee, is a deflationary force for ETH. It promotes its scarcity and links its scarcity to the growth of the Ethereum economy, ”David Hoffman, COO of Ethereum investment firm RealT, told CoinDesk. “The issue of ETH, which pays for security, initially increases the value of ETH. If BASEFEE burns a lot of ETH, the value of ETH should be higher as it is less common. “
Incentives for mining
In practice, miners may have most to lose from the proposal. The new system, where user experience takes precedence over miners’ paperbacks, is unlikely to incur high transaction fees – for example, a purported Ponzi scheme that accidentally paid some multi-million dollar fees.
“It’s better for users because the base charge becomes a constant and users don’t have to worry about sending a TX [transaction]”Said Kosala Hemachandra, CEO and Founder of MyEtherWallet, in an email.” You don’t need to know how congested the network is or when your TX will be down. “
Read more: Ethereum’s ProgPoW debate is about a lot more than just mining
However, intuition may not be a valuable guide. Mining pools operate on the assumption of long-term block rewards, so they are less concerned about programmatic changes than originally thought.
Xin Xu, CEO of SparkPool, told CoinDesk in an email that both he and the Pool believe that “a better fee model design is needed” and that the group “has long supported EIP 1559”. (For reference, SparkPool was once operated under the name EthFans.)
“Maximizing each block reward is important for mining pools, including SparkPool. However, I think the priority is to make the Ethereum network a better network [over] Maximizing every block reward for SparkPool and me, ”Xu said.