Ethereum, the second largest cryptocurrency nowadays, has experienced some changes in recent years. And, this is not near being stopped as more updates are yet to come in the following years. For instance, the upcoming introduction of Ethereum 2.0. These updates will be introduced in the form of Ethereum EIPs so you must know what it is and what it involves. Especially when it comes to the recent EIP introduction called EIP-1559, a new standard that has changed the Ethereum mechanisms as we know it since its launch that happened last year. 

This is why in this article you will learn about EIP, paying particular attention to the EIP-1559 and the specific changes it has involved with its introduction. ¡Keep reading to find out all this information!

What does EIP mean in Ethereum?

Ethereum Improvements Proposals, or EIP for short, are a set of standards that provides technical specifications for the development of potential new processes or features for the Ethereum blockchain. Each change is proposed, discussed, and developed following the EIP process. In other words, EIP could be seen as the ‘’source of truth’’. 

Additionally, it must be emphasized that any Ethereum user from the community has the power to create an EIP as long as they follow the guidelines of how to write an EIP. It will have to contain an abstract, a motivation, and technical specifications. Also, it is expected to include the rationale and information in regards to the compatibility, test cases, and even security considerations

A team of editors and stakeholders in the community will review them and decide if the EIP proposed could be adopted as a standard or as a network upgrade. The author is then responsible for building consensus within a community and documenting any dissenting opinion. 

Blockchain’s evolution

The EIP-1559 has been referred to as being more of an evolution than a revolution. It was created to make fees more transparent and have better control over transactions, benefiting users and providing better predictions for the mining community.

And, even though it is still something in constant development, EIPs could be seen as an encouraging sign that blockchain technology and the crypto world keeps growing, maturing, and becoming more prominent every day.

EIP-1559 explained

A year has passed since the London hard fork update of Ethereum, which happened in August 2021. This update contained several improvement proposals including the EIP-1559. This EIP had a huge impact on the transaction costs 

Ethereum’s monetary policy

The standard EIP-1559 was introduced with the purpose to create a more transparent financial system and move on from the discrepancies involved in the Ethereum blockchain.

The mentioned proposal brings different contributions to the monetary policy of Ethereum: 

  • Transparency to the mechanism of Ethereum’s fees as the price of transaction becomes predictable. 
  • Provides control over the deflationary pressure that the supply of Ether has to face.
  • It manages Ether circulation by eliminating the circulation supply of Ethereum coins.
  • Increase the fluctuating block sizes depending on the network congestion.

Fees in transactions

Going more in-depth about the changes it brings when it comes to transaction fees, it must be said that before the EIP-1559 was introduced, the transaction fees of Ethereum were priced using a price auction mechanism. Based on this system they were some steps that had to be followed. First of all, it involved users sending transactions with fee bids which are also known as gas fees. Secondly, the miners would choose the transactions with the highest bid so they can include them in the block. Finally, the person then will have to pay the price it was specified and that would be it. 

However, this bidding system was causing congestion in the Ethereum system which resulted in higher gas prices and some users having to pay more transaction fees than others. 

Going more in-depth about the changes it brings when it comes to transaction fees, it must be said that before the EIP-1559 was introduced, the transaction fees of Ethereum were priced using a price auction mechanism. Based on this system they were some steps that had to be followed. First of all, it involved users sending transactions with fee bids which are also known as gas fees. Secondly, the miners would choose the transactions with the highest bid so they can include them in the block. Finally, the person then will have to pay the price it was specified and that would be it.

But, this bidding system was causing congestion in the Ethereum system which resulted in higher gas prices and some users having to pay more transaction fees than others. 

The EIP 1559 is changing that as there will be a base fee for all transactions. The base will change according to the congestion of the network and then it will be burned. This way, the user can submit higher fees than the base, they can put up a fee cap and pay the difference between this fee cap and the final base fee.

Consequently, people will have a more accurate estimation of the costs, and fewer users having to overpay for transactions. 

EIP-1599 burning mechanism

With the introduction of EIP-1559, part of the transaction fees are removed or burned from circulation meaning that the supply is reduced and the price of the assets is boosted. On average, this burning mechanism removes around $30 million ETH of circulation every single day. This eliminates the previous method that consisted of paying ETH to miners so they can validate transactions. 

However, it is said that it will not have a deflationary effect in the short term, in fact, a report by Coinmetrics estimated that even if 70% of the base fee is burned, the drop in inflation will not be as high as it may have been forecasted. Also, even when the earning of transaction fees of miners are expected to decrease by 70%, the block rewards remain the same (2 ETH). Furthermore, the net revenue loss to miners is estimated to be between 10% and 20%.

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