Ethereum miners are making a fortune from high gas fees! Why are they accepting the EIP-1559 proposal?

The reason is simple: rather than facing long-term financial losses by protesting against the EIP-1559 upgrade, miners would be better off cooperating with users to promote its implementation.

(This article is authorized reprint from ChainNews, original title "Opinion: Why Ethereum Miners Will Accept the EIP-1559 Proposal?", original article here)

EIP-1559 is one of the most anticipated improvement proposals in Ethereum's history, which will drastically change the user's transaction bidding model and bring other significant benefits.

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EIP-1559 has overwhelmingly won support in the Ethereum community and is technically ready to be included in the London hard fork, pending the normal core developer review process. Miners have recently started to oppose this proposal. This is not surprising as the mechanism will burn some of the transaction fees that miners previously received.

Perhaps counterintuitively, we believe that the best strategy for miners is to support the deployment of EIP-1559.

We examined the two most effective ways miners could protest the proposal and evaluated the above assumptions, which are:

1. Forking Ethereum to create an alternative coin without the EIP-1559 upgrade;
2. Suppressing the basefee to zero to prevent Ethereum from adopting the EIP-1559 upgrade.
3. After considering feasibility and opportunity costs, we found that any form of active protest by miners resulting in long-term financial losses outweighs cooperating with users to promote the EIP-1559 upgrade.

The EIP-1559 upgrade will affect miners' income, which currently mainly comes from three sources:

• Firstly, for each block mined, a subsidy of 2 ETH is given, and uncle blocks also bring additional rewards.
• Secondly, fees from users bidding to enter the block space (regardless of the final position of the transactions in the block).
• Thirdly, miners can extract value from MEV, which is difficult to quantify but highly valuable. Miners can extract this value by inserting (or not inserting) transactions at specific points in the block. Most miners currently "outsource" this to bots that engage in front-running and arbitrage in Ethereum's Mempool.

After activating EIP-1559, miners will continue to receive the same income from block subsidies and MEV. As long as the Ethereum system is not congested (demand is below the block gas limit), fees for included transactions will be burned. When demand exceeds the block gas limit, a first-price auction among traders needs to be increased, and the revenue goes to the miners.

To receive these rewards, miners must invest in mining hardware, purchase power agreements, and other capital expenditures. This investment means that Ethereum miners are structurally bullish on Ethereum and the Ethereum economy, as they must mine to recoup their investment.

Although it is acknowledged that EIP-1559 may indeed reduce one of the three aforementioned income sources, protecting Ethereum and its users still aligns miners' interests with a significant portion of future income. Even if all base fees are burned, MEV and block subsidies will remain important sources of income for miners. Lastly, this upgrade may also signal a turning point in user demand for Ethereum, ultimately promoting the development of the entire Ethereum economy.

Understanding the momentum of Ethereum's development, it is important to note: all three sources of income are derived from users and the applications and enterprises that serve them.

Users create demand for ETH, and miners sell ETH to them in exchange for fiat currency and other tokens within the Ethereum ecosystem. Users' trading, exchanging, borrowing, lending needs generate congestion fees. Lastly, users' usage of decentralized finance DeFi applications, such as decentralized exchanges, for functions like price arbitrage and other opportunities, create MEV.

Users are the backbone of the Ethereum economy. Miners provide services to them in the form of network security. It is a transactional relationship - miners do not provide this service altruistically but in response to the economic incentives users create for them.

In the Ethereum economy, users reign supreme. Miners provide services to them in the form of network security. It is a transactional relationship - if miners provide this service not out of goodwill but for the economic incentives users create for them.

Users have no moral (or other) obligation to pay miners more than what is necessary for Ethereum's security, and miners have no moral (or other) obligation to continue mining without profit.

Ultimately, the momentum between users and miners can be explained by interchangeability. Ethereum users are currently the main source of income for miners, and it is unlikely that miners can replace this status. However, users are likely to replace some or even the majority of current Ethereum miners.

After establishing this fundamental relationship between miners and users, we can envision how this framework operates in various scenarios after the activation of the EIP-1559 improvement proposal.

We envision this scenario merely for the sake of completeness, as many other blockchains face inherent challenges in upgrades. Due to user inaction and staying on the existing chain, it is usually easier to block new proposals.

This scenario will not occur in Ethereum due to the difficulty bomb. In short, if the difficulty bomb is not reset by a hard fork, mining difficulty will continue to increase until Ethereum itself stagnates. Therefore, it is impossible for miners to stay on the old chain - any plans to abandon the EIP-1559 upgrade would require the same cost to execute at least a hard fork that can defuse the difficulty bomb.

For miners, a more feasible proposal is simply to fork Ethereum and create their own alternative coin, similar to how Ethereum Classic ETC stemmed from Ethereum's fork, or how BCH emerged from Bitcoin's fork. The viability of a fork depends on the opportunity cost. Regarding the EIP-1559 upgrade, Ethereum miners must choose between mining new alternative coin blockchains and the existing Ethereum blockchain.

The opportunity cost is no joke but real money, as a blockchain needs to create value for users to provide valuable block subsidies, congestion fees, and MEV. Bitcoin and Ethereum have been forked dozens (even hundreds) of times, but the vast majority of these forks have never gained favor from users.

If the state of a blockchain can still be forked, building attraction is much easier, and all successful forks in the past have achieved this. In the case of Bitcoin, the state is simply a list of token ownership. BCH forked this list, leveraging Bitcoin's existing supply distribution to airdrop new BCH tokens to all BTC holders.

However, Ethereum's state is more complex, encompassing not only the distribution of ETH but also thousands of different tokens, smart contracts, applications, and more. These would also need to be replicated on the blockchain created from the hard fork, but they would be empty on the new chain.

For example, many of the vast number of tokens on Ethereum, such as stablecoins or WBTC, represent claims on real-world assets. Claims can be copied, but assets will not be. These tokenized assets will continue to operate on the Ethereum blockchain post EIP-1559 upgrade, while on the forked chain, they would be meaningless.

As a result, the remaining DeFi applications on the forked chain that rely on collateral, such as collateral-backed stablecoins like DAI or any form of AMM liquidity pools, would disintegrate. In short, everything except ETH, including crucial off-chain infrastructure like oracles, liquidation bots, would collapse on the forked chain, causing massive disruption.

While ETC was able to successfully fork from Ethereum in 2016, a similar event is unlikely to occur today. The tokenization of assets and the emergence of DeFi have made Ethereum's state unforkable.

If Ethereum's state cannot be forked, what about simply copying the secure elements of the Ethereum state (such as ETH distribution) or even launching a brand new coin from an entirely fresh state?

This is more feasible than Scenario 2), as proven by other "stateless" branches of Ethereum like Tron and the recent Binance Smart Chain BSC. BSC's success particularly demonstrates the enormous value nurtured using Ethereum's EVM, existing wallet infrastructure (like Metamask), and developer tools. While decentralized applications DApps are not automatically copied, they can be easily deployed and new assets filled in later.

Given the rapid success of BSC, is there a market demand for a "permissionless" version of Ethereum? Adopting proof-of-work PoW mining instead of centralized node operators. This new chain could even raise the gas limit to cater to users who are currently unable to use Ethereum due to high gas prices.

However, upon further consideration, it becomes apparent that this scenario also has its challenges, primarily revolving around token supply distribution.

If this new forked chain decides to reset the supply distribution of ETH and start from 0, it would lose the existing supply distribution. Guiding a new supply distribution would require years of high inflation, making holding the asset less attractive. In contrast, BSC does not have this issue since Binance Binance is the sole block producer BP and does not require additional mining incentives.

However, if the new forked chain copies the ETH distribution state, many new alternative coins on the new forked chain would fall into the hands of potential adversarial users who might use it for price suppression for an extended period. This would render the block rewards obtained by miners on the new forked chain worthless, indicating that even a "stateless" fork requires some support from existing users.

As outlined, attempts to create alternative coins are fundamentally doomed to fail. This leaves another possibility, which is also the most discussed possibility among miners. In this hypothetical scenario, miners would migrate to the new Ethereum blockchain but subsequently prevent any ETH from being burned by setting basefee to zero.

The way this method works is as follows: The EIP-1559 controller determines the basefee for the next block by observing the size of the previous block. If the previous block exceeds the target gas limit (50% of the gas limit), the basefee will increase to suppress transaction demand. If it is below the target gas limit, the basefee will decrease to stimulate demand.

Miners can technically control how many transactions are included in a block, and therefore, can control block size, hence controlling basefee. If they only mine blocks that occupy less than half capacity, the basefee will never increase above zero, thus no fees will be burned. However, the competitive nature between different miners makes this strategy impractical in practice.

Firstly, suppose a single mining pool with 5% hash power attempts to adopt this strategy. They only mine blocks that occupy more than half capacity, even if demand far exceeds that level. Meanwhile, the other 95% hash power will mine larger blocks, earning more income from transaction fees, and the basefee will increase. The 5% mining pool will soon realize that it is simply wasting money and either abandon or lose all its hash power. This illustrates that selfish miners would want to include as many transactions as possible in the blocks they mine as long as there is competition among them.

What if the competition is not as fierce? Imagine if this hash power not just 5%, but a total of 60% of the hash power agrees to implement this strategy. The outcome remains the same, as the cartel miners comprising 60% of the hash power would mine blocks that occupy half the capacity, while the remaining 40% hash power will mine full blocks, earning all additional income from congestion fees and MEV, and the basefee will continue to increase over time. We call it an unstable alliance.

This strategy only works if adversarial miners can find a way to eliminate competition among themselves, where no one mines full blocks. With 60% of hash power, they can achieve this by implementing what is called a miner-activated soft fork (MASF). This MASF would render blocks over half now invalid, and thus the 60% of miners should simply ignore them. Technically, the 40% hash power can still mine fuller blocks, but the 60% side would refuse to build on those, meaning all transactions and block rewards allocated by the minority cartel would vanish.

It is essential to understand that MASF is not a new concept. Miners can already form such cartels today, for example by raising fees by limiting the gas limit, charging higher fees from larger transactions, or setting price floors. Initially, all these strategies seem profitable, but there are good reasons why miners have not attempted to implement them.

Firstly, this requires mutually distrustful parties to cooperate, which is challenging to achieve. But more importantly, MASF would be an unprecedented attack on the Ethereum network and its users. This would disrupt network stability at the consensus level and undermine user trust in Ethereum. This has already threatened miners' future income, but users could also actively oppose censors. For example, users are expected to start broadcasting transactions directly to a friendly mining pool to deny the censor pool the fees and MEV.

In summary, for miners, basefee manipulation without MASF is not a stable balance. However, if miners do implement MASF, this would be an unprecedented self-destructive attack on Ethereum and its own investments.

Considering the unsatisfactory outcomes for miners in Scenarios 1 to 4, we believe their primary choice is to cooperate with users.

Even if miners earn less on the new Ethereum chain (which is not necessarily the case), it is still much more than what they would earn by attempting to create alternative coins. Any such alternative coin's value compared to ETH is close to zero, will not generate transaction fees due to congestion, nor will it generate MEV due to DeFi arbitrage opportunities.

Furthermore, implementing MASF to suppress basefee would be a transparent attack on Ethereum and its users. We have never seen such an attack, and there are good reasons for that. It could undermine user confidence, ETH value, and economic activity in the system, directly contradicting miners' vested interests.

In addition to the five scenarios discussed above, we also explored different concessions that users might make to appease miners. Mainly:

1. Increasing block subsidies on the new Ethereum chain to compensate miners for the burned basefee.
2. EIP-969 improvement proposal: Changing Ethereum's PoW algorithm to remove ASIC miners from the network.
3. Not burning basefee but distributing it to miners for the next N blocks.
   However, we reiterate that cooperating with users for the upgrade is in the miners' best interest. Therefore, users need not meet miners' demands or make any concessions to them.

These are the reasons why we anticipate the EIP1559 improvement proposal to become a reality, and we are confident in this analysis. We look forward to discussing these topics with the community at the upcoming EIP1559 Upgrade Roundtable (February 26, 2021, 10:00 PM Beijing time).