EIP-1559 has the potential to drive up the price of Ethereum while making transactions more convenient. Some, however, caution that it is not as straightforward as it appears.
As part of an upgrade to the Ethereum network scheduled for Thursday, five Ethereum Improvement Proposals will be implemented into the blockchain’s code.
EIP-1559 is the change that has received the most attention. With that proposal, Ethereum users will be more aware of how much they must pay in “gas” fees in order to have their transactions processed in a timely manner.
The goal is to prevent transactions from piling up on the sluggish network and to make it clearer to them how much they must pay.
Ethereum users have been looking forward to this upgrade for months, hoping that it will increase the value of ETH, lower transaction fees (slightly), and eliminate the guesswork involved in transactions.
Many people have expressed concern that the upgrade will not be a straight line from point A to point B because of its magnitude.
In order to detect any problems with the network’s consensus mechanism, developers will monitor the network’s traffic, and users will double-check the price of each transaction.
“Hard forks are big, fundamental, breaking changes by definition,” Taylor Monahan, CEO of wallet provider MyCrypto, told Decrypt. “Things can go wrong on multiple levels.”
The basic underlying points
In order to alleviate congestion, EIP-1559 increases the capacity of each new block that is added to the chain by a factor of two. Additionally, it eliminates the current auction-based fee structure in favor of an automated base fee structure.
This should help to alleviate the problem of failed transactions, which can result in users of NFT platforms and decentralized lending and exchange protocols built on Ethereum losing thousands of dollars because they underestimated the amount of gas they would require.
“As long as a transaction is sent with a fee higher than the BASE FEE and includes a tip for the miner, it will be included in the next handful of blocks.” explained Ethereum Foundation developer Tim Beiko.
The part of EIP-1559 that is up for debate is where the base fee is spent. It has nothing to do with the miners who process transactions. It has been consumed, which means that the rate at which the ETH supply is growing will slow. The network will take a fraction of an ETH out of circulation for each block that is mined, even though each block will still bring a miner 2 newly minted ETH in. It is possible that more ETH is burned than is created in a high-congestion environment.
The deflationary pressure should be beneficial to investors who hold long positions in Ethereum. The lower the supply of something is, the higher the price it should be able to command.
Why should you be concerned?
Although EIP-1559 has had some positive effects, there are some reasons to be skeptical of its long-term effectiveness.
In the first place, according to those who were involved in the upgrade’s coordination, “It was an incredibly complex change, the largest done on Ethereum mainnet to date, which will improve both the user experience and economics of the entire network.”
The implementation of a previous, less-complex Berlin upgrade resulted in a consensus error that caused 12 percent of all Ethereum nodes—the computers that assist in the operation of the network—to go offline shortly after it was implemented, according to the Ethereum Foundation.
Is there any chance that this update will fail, whether it’s due to a coding error or for some other reason?
Beiko, who is in charge of coordinating network updates, isn’t overly concerned about the situation.
“As for how likely it is to work as intended, I’d say it would be very unlikely for it not to,” he told Decrypt. “We’ve had both technical and economic audits of the EIP, have done extensive testing and have seen it work as intended both on Ethereum testnets and other blockchains.”
🇬🇧⛏ London Mining Misconceptions Thread ⛏🇬🇧
Over the past day or so, I’ve received a bunch of questions/seen concerns about London activating for miners, so hoping to clear a few things out here 😁
— Tim Beiko | timbeiko.eth ☀️ (@TimBeiko) August 4, 2021
In order to iron out the kinks, testnets are an essential part of the process. For example, in late July, developers discovered a problem with Go Ethereum in which an invalid transaction was somehow included in the block on some clients that were connecting to the network. Fortunately, the problem has been fixed and the testnet served its purpose of eliminating any potential problems before they could affect the main network.
The technical-minded Fellowship of Ethereum Magicians, led by Jamie Pitts, asserted that while bugs can be fixed, this type of economic change is difficult to put through its paces. Decrypt reported that “what can’t be easily modeled,” such as “what users will do,” “what happens with price changes,” and “complex feedback dynamics” could “surprise us all tomorrow.”
“this is where the DeFi and NFT users are dealing with gas prices in order to submit [transactions].” Pitts explained. “This is where the wallet teams, such as MyCrypto, will bear a lot of the burden in the short term.”
The team will assist people in troubleshooting any issues that arise, such as a sudden increase in gas prices or network congestion.
Monahan acknowledges that her team is unsure of the exact course of events. ‘The uncertainty surrounding the hard fork in general is likely putting downward pressure on the market at the moment,’ she explained. “If the hard fork occurs and everyone thrives, that pressure should alleviate in the weeks following the fork.” says the author.
An increase in prices could make things more difficult.
“For example, if we break $3000 or $4000 in the next week, trying to determine what fee you need to send will likely be miserable, chaotic hell,” she said. “This is [because] EIP-1559 reverts to (essentially) the current system during periods of increasing network congestion, except everything is now different and the carefully honed tools you once used to determine a good gas price will need to be re-honed.”
Therefore, no one is sounding the alarm that the sky is about to fall in most situations. The possibility of sporadic showers exists, however.