EIP-1559: A Proposal to Update Transaction Fees on Ethereum

Do Ether Transaction Fees Need a Two-Tiered System?

As Ethereum has grown in popularity, estimating appropriate ETH gas fees has become complicated, and users often encounter transaction confirmation delays. Ethereum Improvement Proposal (EIP)-1559 offers a remedy for these issues by updating how transactions work on Ethereum and changing the underlying economics of the network’s existing monetary policy. EIP-1559 proposes a new approach to transaction fees in which users would pay an algorithmically adjusted “base fee” for each transaction, alongside the option to include a tip to speed up a transaction. To better understand EIP-1559, we must first unpack the basic structure of Ethereum transactions.

Ethereum Transaction Fees

Every recorded action on Ethereum’s distributed ledger changes the state of its blockchain and is considered a transaction. Examples of transactions include sending tokens, trading tokens on Uniswap, and opening loans on Compound.

Every Ethereum transaction has an associated cost that helps power the network and prevent bad actors from spamming it. These transaction costs are paid in ether (ETH) and known as “gas.” Currently, Ethereum uses a simple auction system to determine which transactions are included in a block. The more you offer to pay, the more likely a miner will include your transaction in an upcoming block. However, this auction system is arguably inefficient because users must estimate the appropriate fee required to complete their transactions. Consequently, some users pay more than other users whose transactions have been included in the same block. By switching from the current system to EIP-1559, the industry widely believes that users could save approximately 90% in transaction costs.

EIP-1559 and Block Size

Under a Proof-of-Work consensus protocol, transactions are grouped into blocks before being verified and added to a blockchain. While every block changes the state of the Ethereum ledger, the size of a block determines how much information —  or how many changes — are included at one time. Having a smaller block size results in a more condensed and easier-to-manage network, but limits the number and speed of transactions. Having a larger block size allows for more transactions per block, but can potentially overload the system with too much data. Disagreements about what constitutes an ideal block size have been contentious in several blockchain communities. For example: disagreements over Bitcoin’s block size in 2017 eventually led to the hard fork that produced Bitcoin Cash.

EIP-1559 — with its proposal to utilize flexible block sizes instead of fixed block sizes — is the Ethereum community’s attempt to sidestep a potentially bitter debate. By having a two-tiered system that uses a base fee and tips, EIP-1559 creates dynamic and adjustable block sizes that expand and contract depending on demand.

How Would the EIP-1559 System Work?

• ETH fees: Base. If EIP-1559 is implemented, the current protocol for Ethereum gas fees would be replaced by a mandatory and algorithmically determined fee called the “base fee.” This base fee would be paid in ether and fluctuate according to network congestion. The proposal aims to keep the network close to a 50% usage rate, meaning each confirmed block is 50% full. If network usage exceeds 50% capacity, the base fee automatically increases. If network usage falls below 50% capacity, the base fee decreases slightly. This predictable pricing mechanism would allow transaction costs to be automatically set by wallet providers, thus removing the responsibility from users. Additionally, base fees would be burned or destroyed after collection, and would not be kept by miners. This is intended to reduce ether’s circulating supply and potentially drive up the value of the coin by increasing scarcity over time.

• ETH fees: Tips. If you require your transaction to be processed quickly, EIP-1559 would allow you to add a tip on top of the base fee. Unlike base fees, tips go directly to miners, who thus would be incentivized to prioritize transactions that include tips. Because blocks are seldom completely full, under the ideal conditions proposed by EIP-1559, there typically would be roughly 50% available block space that could be allocated to transactions with tips. If there is no spike in demand when a user initiates a transaction, then even a very small tip would be enough to guarantee that a transaction would be included in the next few blocks.

With EIP-1559, in times of increased network congestion, the base fee would rise and users who paid tips would have their transactions processed first. Once all the urgent transactions are cleared, non-urgent transactions would be executed as the base fee decreases — and block space for tips would return to its 50% target. If EIP-1559 is implemented, it is expected that even in times of high congestion, most users would not have to wait more than a few blocks for their transaction to be processed. This would mean your Ethereum transaction would be confirmed in less than a minute as Ethereum’s block times average between 13 and 14 seconds — much shorter than Bitcoin’s 10-minute block times.

Ethereum is still under active development, and EIP-1559 demonstrates that even core aspects of the system can be considered for a drastic overhaul. The EIP-1559 proposal promises to improve how transactions are processed, and to streamline user experience by decreasing transaction costs and making it easier to navigate fees in a less wasteful manner. EIP-1559  also could benefit ETH holders by restricting the supply of ETH through the burning of base fees. By replacing some of the current network’s burdensome technical obstacles with a more dynamic and automated system, EIP-1559 has the potential to be one of the most significant upgrades in Ethereum’s history.