I. What is EIP-1559?
Ethereum (ETH) is believed to be the greatest invention in the cryptocurrency world after bitcoin. Since its appearance, it has driven the crypto realm into mania twice – ICO in 2017 and DeFi in 2020, and this craze has seen no sign of stopping.
The rapid development of ETH is inseparable from its core development team and community management model. One of the features that make cryptocurrency fascinating is that there is no such thing as a single rule in the conception of decentralization. Any decision, no matter how trivial, needs to be agreed upon by all the miners who are involved in the development of the cryptocurrency and keep the blockchain functioning. So EIP, ie the Ethereum Improvement Proposal, plays an important role in upgrading and enhancing ETH technology.
The EIP-1559 we will be talking about in this article is an example of Ethereum improvement proposal. This proposal was first put forward in November 2018 by Eric Conner, an ETH developer. It aims to reform the GAS fee bidding system of ETH, so to reduce the cost for users to transfer money on ETH.
To make it easier to comprehend, let’s just take it as transaction fee for Ethereum instead, so we won’t be touching too much on what GAS is in this article.
The reason why a proposal that has been around since 2018 is not being seriously discussed until today, is due to the network congestion caused by the very two mania, especially DeFi that I mentioned previously. Both have been contributing excessive traffic to the ETH blockchain that results in higher GAS fee, in which sometimes transaction fees could go higher than profits!
Before June 2020 last year, in the case of no congestion, GAS price on Ethereum was less than $1.
Now in 2021, how much do you think the GAS price can rise up to?
Even in the least congested times, GAS price was more than $10, which was a nightmare for users who were just starting out in DeFi, discouraging a lot of new investors and beginner users with limited assets to invest in. (But before you read on, you could also first register on DigiFinex for there are over 200 kinds of cryptocurrencies available for trading too.)
This has then ignited a full discussion in the ETH communities about EIP-1559.
II. How will it affect everyday users?
The ultimate goal of EIP-1559 is to reduce the GAS Fees for ETH transactions. But in fact, the effects of EIP-1559 goes far beyond the reduction of GAS price. In short, it will bring the following effects to everyday users:
1. Transfer fees are significantly reduced to avoid transfer failure and additional losses caused by insufficient GAS fee:
Under the framework of the EIP-1559, the concept of GAS Price is removed. The system will automatically quote a reasonable price to the users, and they will be able to choose whether they want to pay an additional fixed tip, instead of having to set up a bid to compete to be the first to be recorded in blocks, as in the past. This part may be difficult for users who are not familiar with the specific content of EIP-1559 to understand.
To put it simply: it fundamentally alters the unreasonable and crazy price hike of GAS fees, and restrains the further increase of GAS fees, making it affordable for users.
2. It will burn part of the ETH rewards to miners to reduce the circulation of ETH in the market, which may drive the price of ETH to rise:
As we all know, blockchain is a distributed ledger where your transactions can only be confirmed on the chain after miners package the block for ETH as rewards.
Under the current ETH mechanism, miners can receive nearly 8 ETH as rewards in each block, of which 2 ETH are automatically generated by the block, and about 6 ETH are transaction fees from the block.
When EIP-1559 comes into effect, miners’ fixed transaction fees will be burned in favour of tips, which is given by system in default. This will decrease the ETH production, resulting in deflation compared to the previous growth rate.
So if EIP-1559 is approved, there is a chance that the price of the ETH will rise.
3. EIP-1559 reduces miners’ revenue, so it is possible to cause ETH hard fork:
First of all, what is a hard fork? If you have gone through the whole history of blockchain, you should be familiar with this concept.
Cryptocurrencies are decentralized in nature. If developers and miners do not agree on a change or an upgrade, some of the opponents have the right to fork the cryptocurrency. For example, BCH and BSV are the forks of BTC. And ETH also had a hard fork in history. It is actually a new coin forked out of ETC (Ethereum Classic), so it is hard to say whether a hard fork will be good or bad for ETH in the future.
However, it is generally accepted that any chain on the side of the ETH founder Vitalik Buterin will survive. Currently, it seems that Vitalik Buterin will definitely be on the EIP-1559 side.
To sum up, the adoption of the EIP-1559 will greatly reduce the user’s transaction costs on ETH and bring massive liquidity. At the same time, due to the new burning mechanism, it can effectively curb the growth of the number of ETH, causing deflation, so as to drive the market value of ETH. At this point, I assume you have already developed your own understanding of EIP-1559 (Click here to trade ETH).
(The above opinions are for reference only and should not be considered as investment advice)
The hard fork of EIP-1559 has been strongly supported by ETH developers and users, but also strongly opposed by partial ETH miners. The final result will be seen in the “London hard fork” in July or August this year. As traders and participants, we need to be very attentive to how this will play out.
Finally, I would like to remind you that the crypto market is highly risky and any investment decision should be made with caution. All the above contents are just for your information about EIP-1559 and does not constitute any investment advice. After all, risk comes from not understanding enough of what you are doing.