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If implemented a year ago, could burn nearly a million Ether? What exactly is EIP-1559?

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If implemented a year ago, could burn nearly a million Ether? What exactly is EIP-1559?

According to data released by Spencer Noon, head of DTC Capital, if EIP-1559 had been implemented in the past year, it would have burned 970,000 Ether (ETH) worth approximately $360 million. So, what exactly is EIP-1559?

Current Issues

This year, driven by decentralized finance (DeFi), there has been a surge in transaction demand on the Ethereum network, leading to a significant increase in gas fees. Last week, blockchain data analysis platform Messari pointed out that Ethereum's gas fees have been higher than Bitcoin's for two consecutive months, marking the longest winning streak in history.

However, despite the significant increase in overall Ethereum usage, it has not translated into a corresponding price increase for Ether. The main reason is that Ethereum miners also follow the principle of "mine and sell," meaning that as miners earn more mining revenue, the selling pressure on Ether in the market will also increase, thereby limiting the price of Ether. In other words, current Ether is unable to effectively capture the protocol's value.

EIP-1559

EIP-1559 is an important improvement proposal to address the above issues. Proposed by Ethereum founder Vitalik in 2018, it will significantly change the way transaction fees are calculated, impacting the value capture of ETH, user experience, security, and more. In the short to medium term, the impact of the EIP-1559 proposal on the price of ETH may be second only to ETH's PoS, and in the long term, it can have a lasting impact.

In general, the EIP-1559 proposal aims to achieve the following three points:

Change fee structure

In the EIP-1559 proposal, on-chain transaction fees will be split into "base fee" + "tip." The "tip" is an additional fee paid by users to miners to expedite transactions, while the "base fee" is the minimum basic fee required for each transaction.

Change fee destination

Currently, miners' income comes from "block rewards" and "on-chain transaction fees." However, according to the design of the proposal, miners will only be able to receive "block rewards" and "tips from on-chain transaction fees." The "base fee" does not go to miners and will be burned directly, removing it from the total circulation.

More flexible blocks

Currently, Ethereum blocks are limited to around 12.4 million. However, EIP-1559 will provide blocks with dynamic scalability to cope with network congestion, and the base fee can also be adjusted based on congestion and a specific formula.

Better user experience

Currently, when users interact with the Ethereum blockchain, they must compete with other users by offering higher transaction fees to miners to expedite transactions. One of the drawbacks is the need for fee estimation, leading to additional expenses. EIP-1559 aims to implement as uniform fees as possible for all transactions, allowing users to decide whether to pay fees without much consideration of the bidding amount.

If Implemented a Year Ago, Could Burn Nearly a Million Ether

Compared to the current mechanism, adopting EIP-1559 could provide Ether with better value capture capabilities. According to a data survey released by Spencer Noon, head of DTC Capital, if EIP-1559 had been implemented over the past year, it would have burned 970,000 Ether (ETH), worth approximately $360 million.

In July of this year, in response to the rising on-chain transaction fees, Vitalik Buterin advocated considering EIP-1559 as a solution.

However, since EIP-1559 will significantly impact miners' income, it has sparked strong opposition from the mining community.

Opposition Not a Minority

On October 7th, ConsenSys developer Tim Beiko conducted a survey on the proposal. Out of 25 interviewees from developers, projects, and miners, 60% expressed support, but 8 out of 9 mining companies claimed that they would not accept the proposal if it is adopted in the next hard fork.

On the other hand, earlier this year, Dan Finlay, a developer at Metamask, publicly opposed the fee structure design of EIP-1559. He stated:

"When there are a large number of unconfirmed transactions on the chain and a significant difference in the highest 'tip' that submitters are willing to pay, a unit price auction must be conducted in each block. This not only fails to solve the current market issues but also creates more problems."