Possible impact of the code change from EIP 1559 on Ethereum

  • Ethereum EIP 1559 is expected to be released in the middle of next month
  • The algorithm change has been proposed since then in 2019 and has remained a bigger controversial topic
  • The change promises to lower transaction costs, but many don’t believe the change could affect the costs incurred
  • Algorithmic change can bring economic instability and more predictable monetary policy in the network
  • EIP 1559 can reduce the mining rewards that could result in miners trying to attack the network
  • The change will not make it possible to solve the problem of earning MEV from multiple sources

Ethereum is the second largest cryptocurrency in terms of market capitalization, according to CoinMarketCap. On Friday, Ethereum developers proposed three test network releases for London. Ropsten is the first of the three test nets to be subjected to a downward incompatible upgrade at block number 10.499.401. In particular, it is expected that the block number will be dismantled next Thursday.

What is Ethereum’s EIP 1559 proposal?

The Ropsten testnet includes five algorithm changes, also known as Ethereum Improvement Proposals (EIPs). The proposal includes new JSON-RPC endpoints and introduces changes to the block header, adds a new transaction type, and changes the behavior of clients in many aspects such as mining, transaction pooling and others.

– Advertising –

It is noteworthy that of the five EIPs known as the London EIP 1559, the most anticipated and controversial is the one. In addition, the proposal was presented in 2019.

What makes EIP 1559 controversial?

The change to the EIP 1559 code is intended to minimize the basic fee for sending transactions on the Ether blockchain. These charges are dynamically adjusted based on network activity and demand for blocks.

Several misunderstandings have been observed in the cryptosphere since the proposal for EIP 1559. In particular, many were concerned about the use and impact of the Code on end users, miners and investors. In the current scenario, there are four myths related to the particular code change that CoinDesk has detected.

Could EIP 1559 lower the high fees for Ether?

One of the four myths is that Ethereum EIP 1559 can make transaction fees less volatile and essentially more predictable. In the current scenario, the random system for determining the fees for Ether, the costs of completing transactions can increase. In fact, the factor depends on the ups and downs of the entire market.

Source: Coin Metrics

In the context of the controversial EIP proposal, the fees are regulated in such a way that they fluctuate depending on the block space. According to CoinDesk, by developing an algorithmic model to automatically adjust costs by a factor of at most 1.125x per block space.

However, experts believe that this change in algorithms will not reduce transaction fees on the ETH blockchain.

Can a code change make the network’s monetary policy more predictable?

In the list of myths about the EIP 1559, the second is the prediction of monetary policy. Many were concerned whether the change could make Ethereum’s monetary policy more predictable.

The proposed change introduces a fee-burning mechanism that will permanently withdraw coins from circulation. Despite the distribution of the coins among the miners, burning them can ensure that there is no financial incentive for the miners to artificially overload the blockchain. In addition, the factor also helps to keep the basic fee high.

Coins burning in particular can bolster a BTC-like narrative about limited supply for the Ethereum investment case. Still, it’s difficult to predict how much Ethereum coins could burn.

Source: Coin Metrics

However, the mechanism is expected to make monetary policy more unstable over a longer period of time. Ultimately, the above factors will bring economic instability to the blockchain by making it impossible to control how much Ethereum is available in total.

EIP 1559 could force ether miners to stop and attack

It is expected that changing the code could result in miners losing 20 to 35% of their income. Following the scenario, miners filed petitions with Ethereum to prevent the change from being accepted in its current form. In addition, with the proposed changes, miners will see an increase in their income from other sources. Ultimately, the adjustments in the network will remain and the competition for rewards will become fairer.

Despite opposition, the July release date was set and the question arose whether the miners could possibly resist the London move. If the miners resist, they have to shut down their machines, which weakens the security of the network.

Read more: Three Ethereum test networks are scheduled to start in June

Read more: Ethereum Classic needs a change to outperform Bitcoin and Ethereum

In particular, experts believe that there are numerous reasons why the miners will sabotage the network. The main reason for the scenario that could be generated is that the miners would have to forego rewards that they would otherwise have earned by improving the oil rigs and continuing to operate. On the other hand, it is known that the miners at ETH have a small outlier and forego 100% rewards if the network switches to proof-of-stake.

Will the change in code solve MEV’s problem?

On the Ethereum blockchain, miners of ETH coins are compatible with a fixed block subsidy and fees. Due to the growing popularity of high-frequency trading on decentralized platforms, the miner’s income from the Miner Extractable Value (MEV) has become profitable.

According to Flashbots, the daily income of MEV miners has increased from half a million since the beginning of this year to $ 6 million.

Source: Flashbots

Quantifying MEV is a challenging task as miner income can come from transactions within a block whenever a user interacts with another user or other application on the network. Ultimately, changing EIP 1559 could reduce miners’ ability to rely on transaction costs to extract MEV. However, the ability for miners to order transactions and thereby earn MEV through various options remains unchanged. According to Philip Daian, the transaction costs paid by users for inclusion are actually a very small drop compared to the later market.

Comments are closed.