EIP-1559

EIP-1559 is a major upgrade to the transaction fee mechanism of the Ethereum blockchain, implemented as part of the London hard fork in August 2021. It fundamentally reformed how users pay for transaction inclusion by introducing a base fee that is algorithmically adjusted and burned, alongside an optional priority fee for miners. The proposal aimed to improve the user experience by making gas fees more predictable and to alter the economic model of Ethereum by introducing a deflationary pressure on the supply of Ether.

Overview

The proposal was primarily designed to address the inefficiencies and poor user experience of the first-price auction model previously used on the Ethereum network. Under the old system, users submitted bids, creating uncertainty and frequent overpayment. Key architects of the change included Vitalik Buterin and researchers like Barnabé Monnot from the Ethereum Foundation. The core innovation involved a variable base fee per block that is burned, decoupling miner revenue from network congestion, and a separate tip for miners. This structural change was a foundational part of Ethereum's roadmap leading up to its transition to proof-of-stake with The Merge.

Technical specification

The mechanism introduces a base fee that is calculated per block based on the level of congestion from the previous block, as defined by a target gas usage set by the protocol. This fee is mandatory, paid in Ether, and permanently removed from circulation through a burn process. Transactions also include a priority fee, or tip, which is paid directly to the block proposer, such as a validator post-The Merge. The total fee cap for a transaction is the sum of these two components. The adjustment of the base fee follows a formula that increases it when blocks are above the target and decreases it when below, creating a self-regulating fee market. This design was informed by extensive simulations and economic modeling discussed within the Ethereum Research community.

Effects and impact

Following its activation in the London hard fork, the upgrade significantly altered the economic dynamics of the Ethereum network. The burning of the base fee has led to periods where more Ether is destroyed than is issued, applying deflationary pressure, an effect often referred to as "ultrasound money" by proponents. Predictability of transaction costs improved for users of DeFi protocols like Uniswap and OpenSea. The change also reduced the volatility of miner revenue, which was a point of contention prior to The Merge. Data from analytics platforms like Etherscan and Glassnode shows a substantial amount of Ether has been permanently burned since implementation, impacting the overall monetary policy.

Implementation and adoption

The upgrade was deployed successfully on the Ethereum mainnet on August 5, 2021, as the central feature of the London hard fork. Client teams for Geth, Besu, Nethermind, and Erigon all implemented the necessary changes. Widespread adoption by wallet providers like MetaMask and infrastructure services was crucial for user experience, requiring updates to fee estimation algorithms. The change was also adopted by several Ethereum layer-2 scaling solutions and sidechains. Its implementation was seen as a critical test of Ethereum's governance and developer coordination before the larger transition to proof-of-stake.

Criticisms and alternatives

Despite its success, the proposal faced criticism from some Bitcoin proponents and segments of the Ethereum mining community, who argued the burn mechanism constituted a form of monetary policy change. Some economists, including those from CoinDesk and academic circles, debated the long-term efficacy of the fee market design under varying demand. Alternative proposals, such as a PBS model or different auction mechanisms, were discussed within the Ethereum Magicians forum and by researchers like Tim Roughgarden. The debate also touched on the role of MEV and how the fee market interacts with proposals from Flashbots.

Category:Ethereum Improvement Proposals Category:Ethereum Category:Blockchain protocols