Before Ethereum (ETH) adopted the Ethereum Improvement Proposal 1559 (EIP 1559) upgrade to their transaction fee on August 5th, 2021, gas fees were random and insanely high.
Thankfully, in 2019, Ethereum’s Founder, Vitalik Buterin, proposed a new method for processing and calculating transaction fees on the Ethereum blockchain through algorithmically generated fees based on blocks’ capacity and the blockchain’s current state.
EIP 1559 has since transformed Ethereum users’ experience, transactions predictability and delay. It also doubled Ethereum’s deflationary pressure.
What was Ethereum’s payment like before EIP 1559?
In the auction-based legacy system, pre-EIP-1559, you could only guess at your gas fee charge before you make your transaction on the Ethereum blockchain.
You then try to seduce the block producers with your transaction fee into including your transaction in the next block.
Naturally, block producers prioritize high-gas-fee transactions over transactions with lower fees. Sadly, since each block caps at 12.5 million gas, you might have to wait a while before completing your transaction.
Why is this the case? Because Ethereum blocks’ capacity needed to be more scalable with congestion demand, it would take several blocks until after the nodes paying high gas fees are satisfied before the validators attend to the low gas fee payers.
Vitalik Buterin, thereby, proposed EIP 1559 to solve this issue.
How does EIP-1559 work?
EIP-1559 adopts the Base Fee and Tip regarding the block capacity.
Base Fee: Base Fee is the minimum algorithmically set transaction fee every user must pay for an Ethereum transaction.
The EIP-1559 network aims to achieve a 50% fee-to-utilization equilibrium by adjusting the base fees according to the network utilization. Unlike gas fees, the network automatically burns every Ethereum price paid as Base Fees.
Tip: Tip is the amount you choose to pay to incentive validators to include your transaction in the next block.
Fee Cap: Fee Cap is the maximum amount you choose to pay for a transaction.
Ethereum’s legacy system’s block capacity maxed at 12.5 m gas fees per block. And the blocks’ capacity needed to be more scalable with increasing congestion.
EIP 1559 implements doubling the size of the blocks to 25m gas fees per block. But each block will normally operate at 50% capacity.
When there is congestion on the Ethereum blockchain, the smart contract algorithmically increases the base fees by 12.5% and, thus, the subsequent block’s capacity. And vice versa for lower congestion.
So what problems does this solve?
Making transaction fees more predictable
EIP 1559 base fee algorithmic block-based calculation enables DeFi wallets to calculate clear-cut base fees easily.
To bid your transaction’s position in the next block, sign the transaction with your wallet and select the maximum fee (Tip + Base Fee) you’re willing to pay.
Improving user experience by automating the fee-bidding system
Nobody enjoys waiting for hours to verify their transactions. EIP 1559 provides transparency and efficiency in Ethereum’s transaction fees.
Instead of relying on the gas fees paid in the previous block and bidding relative to that, users can trust the automated base fee that is algorithmically adjusted to the network’s congestion.
EIP 1559 lets users know what they’re paying and has a clearer idea of how long their transactions will take, eliminating the fear of the unknown in Ethereum transactions.
This way, users have a better experience transacting on the Ethereum network.
Creating positive feedback loops between network activity and Ethereum’s supply
EIP 1559 implementation ensures every ETH paid as a base fee is burnt. This way, the higher the Ethereum’s network activities, the more ETH will be paid as base fees and, ultimately, burnt.
Simultaneously beating down ETH supply and pumping ETH demand. And what does that mean? EIP 1559 ultimately drives up Ethereum’s deflationary pressure.
EIP 1559 lasting impact on transaction fees
EIP 1559, by itself, does not directly reduce Ethereum’s transaction fees—not in the whole sense.
It however provides credibility and transparency that boosts Ethereum’s payment efficiency, improves users’ experience and helps them cut unnecessary charges, reducing their transaction fees.EIP 1559, combined with the Ethereum’s merge effect, is the future of optimal transaction fees on the Ethereum network.