The Need for EIP 1559
The Ethereum blockchain is once again in the news. The reason is that Ethereum developers approved one of the biggest changes to the Ethereum network called the Ethereum Improvement Proposal (EIP 1559). Also known as the London Hard Fork, the EIP 1559 was implemented this week. The news was not only confined to the crypto world but it has been published in the mainstream media as well.
So, what is this EIP 1559? Why is the crypto world going gaga over this change?
The Need for EIP 1559
Before going into details of EIP 1559, it is important to understand the need for this change. Traditionally, Ethereum used an auction mechanism to decide the transaction fee. To perform a transaction, users place bids in the form of gas prices wherein the highest bids are chosen by miners normally. This method brings in a lot of inefficiencies. Firstly, this mechanism brings a lot of gap between the social cost of transactions and the volatility of the transaction fee. When it comes to mature public chains, the gas price becomes highly volatile. Moreover, it also creates a lot of instability as miners perform selfish mining attacks to steal transaction fees. This mechanism of first-price auction where miners choose the highest bid transaction is naturally inefficient. Moreover, users have to wait needlessly for the transaction to be published on the block.
Looking at all these inefficiencies, the Ethereum team came up with EIP 1559, a transaction pricing mechanism that will fix a base price for transactions for inclusion in the next block. For faster inclusion, users can pay a tip to the miners which is called a priority fee.
How Does it Change the User Experience?
It is important to understand the implication of this hard fork. Firstly, this change will not reduce the gas fee. However, it will enable the user to predict the fees so that he can avoid overpaying for the transaction. For instance, the base fee will decrease by 12.5% when the blocks are zero full. When the block is 100% full, the fee will increase by 12.5% and it remains the same when the block is 50% full. It will bring more transparency to the system. For instance, wallets with predefined settings related to the urgency of the transaction will provide better estimates which means users can make the right decision about the transaction fee.
The EIP 1559 implementation will also improve the user experience. During the network congestion, the fee will increase or decrease by 12.5% based on the demand. So, users can pay a higher fee to continue the transaction or bid a lower fee and wait till the price comes down. One interesting change is that you can only pay Ether to an Ethereum miner to process the transaction, a move that will strengthen Ether in the ecosystem. Node operations should upgrade the client version to be compatible with this London upgrade.
How Does it Affect DApps?
In the DeFi space, Oracles provides pricing information to network actors. It is important to know the value of a user’s collateral to decide whether to liquidate it or wait for more time. During the time of network congestion, the base fee that is governed by a predetermined algorithm exponentially increases. As the information provided by Oracles is time-sensitive, they end up paying more in the form of fees. As such, these networks should optimize their strategies while providing the pricing information to DeFi networks.
Upcoming Ethereum 2.0 Milestones
Changing from Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus is a notable feature of Ethereum 2.0. Ever since its inception, Ethereum has been facing scalability issues. With the 2.0 upgrade, Ethereum aims to perform 100,000 transactions per second implementing shard chains. It will become less energy-intensive as well.
Ethereum 2.0 updates are as follows:
- On Dec 01, 2021, Beacon Chain was implemented.
- The merging of Mainnet with the Beacon chain will happen in 2021/2022. This will be an official switch from PoW to PoS consensus.
- Shard Chains will be shipped in 2022.
The London Hard Fork schedule is follows:
|24th June, 2021||Ropsten testnet|
|30th June, 2021||Goerli Network|
|7th July, 2021||Rinkeby Network|
|5th August, 2021||Mainnet Network|