What is EIP-1559?

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Earlier this year on August 5th, the Ethereum London fork went live on its mainnet making some significant changes in the Ethereum network’s monetary policy and transaction fee structure. One of the most significant changes in EIP-1559 aKa Ethereum Improvement Proposal 1559 making the Ethereum network’s utility coin Ether a deflationary supply and changing the transaction fee structure.

So, what is EIP-1559, and how does it changes the transaction fee structure? Let’s find out.

Understanding EIP-1559

To understand the new fee structure introduced by the EIP-1559, let us first delve into the legacy transaction fee structure of the Ethereum network. In legacy transactions, the network required the participants to pay the transaction fee known as gas_price allowing miners to select the transactions based on gas_price.

However, with the London upgrade, the network allows the participants to specify two different values of transaction fees with EIP-1559 transactions. These two specific values are known as max_fee_per_gas and max_priority_fee_per_gas. In a simple language, with EIP-1559 transaction, the network determines the base fee per block depending upon the network usage and allows the participants to pay a base fee for their transactions and an option to pay a tip to the miner in order to confirm their transaction faster.

Basically, with the legacy transactions, network participants are supposed to submit a bid to the miner to get your transaction confirmed in the next block. However, it made it difficult for users to estimate the optimal fee. Whereas the miners were incentivized to pick the transactions with higher bids, thus resulting in the long delay of transactions with lower fees and making the network unpredictable, especially during the high network usage.

Whereas the EIP-1559 sets a base fee letting the users know about the minimum fee needed to be included in the next block. As we mentioned earlier, this base fee is adjusted automatically by the network in a block-by-block manner depending upon the network usage. Along with the base fee, EIP-1559 allows users to add a tip for the miner to make their transaction confirm faster.

Thus, making the network fees more predictable in nature and making it a bit easier for the participants to make transactions or run their applications on top of the Ethereum network.

Now, let’s get to the point of how EIP-1559 makes ETH a deflationary supply.

Burning Ethers

Well, it’s also worth noting that with EIP-1559, the network automatically burns the block base fee with every transaction. Thereby making Ethereum’s native currency Ether more deflationary. So far with the London upgrade, the Ethereum network has burned over 650,000 ETH that is worth over $2.7 billion.

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