EIP1559 – Ethereum’s blessing or curse?

In this article we will take a deep dive into the infamous EIP1559 that should tackle the high Ethereum Gas fees. It’s a hot topic with plenty of controversy. 

It’s not a secret that the Ethereum network is plagued by high gas fees and network latency ever since we have witnessed the meteoric rise of decentralised finance ( DEFI ), Non fungible tokens ( NFT’s ) and cryptocurrency built using the Ethereum network ( ERC20 tokens ). This is exactly why the EIP1559 ( Ethereum Improvement Proposal nr.1559 ) is such a hot topic. It’s designed to make the whole network more scalable and make the dredded Gas fees more affordable for all the network participants. Loved by the network users, hated by the miners, the EIP1559 is truly a red hot chili pepper in the 2021 crypto space. Let’s check out what all the fuss is about. 

Ethereum – Current state  

 

 

Today there is no other network in the whole of crypto space that’s being used more than Ethereum. And why shouldn’t it be? It’s a swiss army knife of blockchain architecture for god’s sake. A pinnacle of versatility and flexibility as it was conceived back in 2014.  No wonder it’s working harder than a Dutch brothel. Swarms of eager developers are deploying their smart contracts, NFT’s and ERC20 tokens on a daily basis. Unbenounced to many, this is actually a natural step in the development of any new technology. Remember how slow the images and websites used to load on our trusted 56k bit modem? Downloading a single MP3 song took hours!

Not many people remember this, but the problems with the Ethereum network congestion started back in 2017 with the deployment of Crypto Kitties. These funny looking non fungible tokens with their special “Cattributes” have taken the world by storm and ended up clogging the whole network in a short period of time. We have seen the chinks in Ethereum’s armor long before any serious DAPPS came to be. 

In the summer of 2020 we saw the rise of Decentralised Finance ( DEFI ) and naturally all hell broke loose for Ethereum once more. Fortunes were made and lost, while the network Gas fees simply went through the roof yet again. When we make a simple transaction on the Ethereum network ( for example sending ETH or an ERC20 token from one address to another ) it’s considered to be a very light load on the decentralised computer called the EVM ( Ethereum Virtual Machine ). Naturally the Gas fee for the use of the network will also be very low. However when we open the taps of Ethereum’s fullest potential, things start to get complicated ( and expensive ) very quickly. Let’s check out a simple example of what we have to deal with these days, shall we?  

Emppu is a programmer from the city of Kauhava in Finland. Aside from tinkering with computers and going to heavy metal concerts, he loves to pull fast and ambitious arbitrage trades on Decentralised exchanges ( meaning capitalising on price differences between several exchanges that can arise from time to time ). He spots an opportunity to earn a quick buck and naturally being the smart programmer, he won’t let this chance slide. Following the cold, Scandinavian logic, he constructs the following transaction ( all being executed in 1 block of just 10 seconds! ). He uses Maker DAO protocol to mint DAI stablecoin. He uses the AAVE protocol in order to receive a flash loan for 100 000 Ether and sends this flood of cryptocurrency to purchase an ERC20 token from exchange A, paying only 1 usd for each token. At the same time ( in the very same transaction ) this ERC20 token is sold on a different decentralised exchange B for 1.05 usd. In the grand scheme of things this 5 cents profit doesn’t seem much, but multiplied by 100 000 Ethereum, it starts to add up. The last step in this transaction is to return the borrowed swarm of Ether back to the AAVE lending protocol and pocket the profit from this nice and fast arbitrage trade. Emppu can now relax and have a well deserved coffee and a break. Well done! 

However If we count the number of smart contract interactions in this simple example, we will quickly notice that this relatively simple arbitrage trade will be insanely expensive when it comes to the Ethereum Gas fees, since all DEFI interactions are very complex calculations that require some serious number crunching from the EVM. Adding insult to injury, we have to keep in mind that Emppu wants his blitzkrieg arbitrage trade to go through in a blink of an eye regardless of the cost, therefor he deliberately selects an extremely high gas limit in order to “bribe” the miners into processing this transactions first. Where did we go from here?

Victim of its own success 

 

 

As you see from the example above, all that awesome functionality of the Ethereum network comes at a price. Not only do all of these complicated transactions cause a logistical nightmare for the whole network ( clogging it even further ), it also quickly sets up a precedent whereby the ever ballooning gas fees become the standard for pretty much ALL network participants. Many people end up overpaying for gas fees in the process.

In our case after the whole network has been brutally violated by bots, arbitrageurs, smart contract developers and other “big players”, even a simple transaction begins to look pretty damn expensive. It’s got to a point whereby projects like the Binance Smart Chain have been taking the lead in democratization of the smart contract network space. We can’t blame them. People are flocking to any kind of solution that can help them to send transactions in a fast and seamless way. There are off course layer 2 scaling solutions out there. Usually they take the grunt work of number crunching away from the Ethereum’s main net, alleviating the high costs of gas in the process. This all sounds very nice, however these scaling solutions are pretty damn difficult to use for any non tech savvy person dabbling in the crypto cpase. 

Aside from that, even the ethereum compatible wallets get confused and don’t know what gas limit they can suggest to the users. This off course oftentimes results in transactions that linger in the mempool for hours on end, simply because the Ethereum miners ( just like in Bitcoin by the way ) always chose to mine the transactions that carry the highest gas limit. You can physically pay to cut in line if you wish to. No wonder people are saying that dabbling in DEFI on the Ethereum network has become a game of the rich. The problems of Ethereum have been known in the past. This is one of the reasons why ETH 2.0 is being developed in the first place. Until this gargantuan task is completed however, the EIP1559 could be a potential solution. Let’s dig right in. 

IEP1559 – Nuts and bolts of the proposal 

 

 

In general the Ethereum Improvement Proposals ( EIP’s ) don’t get any media attention, due to the heavy technical nature of these often incomprehensible documents. Not with this one though. You see the IEP1559 has been around since 2019 and was proposed by Vitaly ( Vitalik ) Buterin himself. If implemented, it will cut right into the bread and butter of the Ethereum miners. Why? 

Simply because it will make sure that the miners receive LESS mining rewards in total. Currently the miners receive the gas fees together with the block subsidy reward. Ironically the gas fees have now become larger than the block reward ( whitch was usually not the case in the past ). This phenomenon has led towards a boom in new Ethereum mining rigs and an explosion of the network hash rate. So how does EIP1559 change everything? 

For starters it aims to set a base fee for all transactions. No more bribing the miners with those deliciously high gas fees. There will be just one gas fee in the end. Aside from this, the block size of Ethereum will also be allowed to grow in size when the network demands more number crunching. Bigger block size means more transactions can fit inside each block. Last but not least, for those high speed transactions that really NEED to be processed as fast as possible ( like our Finnish programmer Emppu likes it ), there will be an option to “tip” the miners. This way there will still be room to pull these lightning fast and complex transactions without any issue. The whole idea between the EIP1550 is not only to reduce the gas fees, but also to eliminate the congestion from the network as preparations for the ETH 2.0 are taking place. Needless to say the ETH 2.0 will work without any miners involved. 

Let’s look at an example of an EIP1559 in action. Imagine that the network congestion is about 50%, so our block size is about 12.5 million gas per block and we have moderate activity of thousands of happy participants on the Ethereum network executing their normal operations. Suddenly out of nowhere, the next insanely hot ICO ( like the TYC token ) launches and many more people suddenly flock to the network in order to purchase these new coins. Here’s what’s going to happen. 

The block size will grow to 25 million gas while the base fee will remain the same. The urgent network users will tip the miners a bit more for their blitzkrieg transactions and the network congestion will pick up. The wallets sending Ethereum ( or Ethereum based tokens ) will automatically have the ability to foresee the upcoming rise in gas prices and will calculate the suggested gas fees a lot more accurately. This means the users of Ethereum network will ( theoretically ) never have to overpay for gas fees ever again. Pretty cool! So you see, the general idea is to move the volatility of the current gas fee structure into the volatility of the block size. Bigger blocks when the network activity is high, and smaller blocks during dormant periods.

Aside from this cool mechanism, the base fee paid to the miners will actually get BURNED completely. Resulting in only 2 income streams for the miners: the tip and the block subsidy reward. It’s a huge benefit to all the users of the Ethereum network, but of course not all sunshine and butterflies in the land of smart contracts. Let’s look at the potential problems that the EIP1559 can run into. 

Potential problems of the proposal

 

 

As you might have imagined, screwing around with the bread and butter of huge industrial mining operations cannot go unpunished. To say that the miners aren’t happy with the EIP1559 would be an understatement. In fact the rebellion of the machines is just getting started and just like in any industrial operation, the miners are going on strike. 

They plan a show of force in April of 2021 just to demonstrate to the Ethereum’s developers that they too have a say in this matter. Who can argue? Being an Ethereum miner in 2021 has been nothing less than extremely profitable and just like the sellers of spades and Levis blue jeans of the prospecting era, the large scale producers of industrial ASIC miners for the ethereum network have been making a killing this year. In fact most Ethereum ASIC machines are sold out months in advance and the gamers are still cursing at Ethereum miners for buying up all of their precious graphic cards. This is truly a never ending battle. 

Another fact that’s worth mentioning, that during certain times of the network usage, Ethereum will actually become deflationary ( thanks for the burning of the base fee ). While this is off course great news for investors, it leaves us to ponder the possibility of the price that Ether must reach in order to become attractive for ALL the participants in the ecosystem including the miners. What about those gas fees then? Will they get lower? They might in the beginning. But as the network grows, there’s no way to predict how high the “tips” to the miners will become. One thing is for sure. We cannot go on using gargantuan gas fees of today’s network any longer, while the second layer scaling solutions are way too complicated for your average grandmother to figure out. 

Last but not least it’s important to mention that such an ambitious endeavour like the EIP1559 proposal is bound to create division inside Ethereum’s ranks. We already have the Ethereum Classic hard fork ( since the DAO hack ). Nobody can predict what the implementation of the EIP1559 will lead to. Whatever will happen, it will surely be a brutal battle where many people ( especially the miners ) will be on the losing side of the proposal. This all begs the question. 

What’s the future of Ethereum?

 

 

For any crypto investor who plans to take a round the world trip for the next 5 years without worrying about his coins, Ehtereum would still be in the top 3, rubbing shoulders with big daddy Bitcoin and the all mighty Monero. Why exactly? 

Simply because the current problems are nothing new to this seasoned veteran. There was the infamous DAO hack that spawned the Ethereum Classic hard fork, there were countless “Ethereum” killers that came and went and there will be even more problems as we move forward. This is the curse of pretty much all new technology. Remember how we still had to pay for each of the text messages that we sent from our cell phones? Or how slow, expensive and clunky the first internet connection was. It all got faster and more streamlined with time. So will Ethereum. 

In the end a fact remains a fact. Ethereum is the most widely used smart contract network in the world. It has the biggest army of motivated developers, the biggest amount of second layer scaling solutions and the financial backing of pretty impressive players. Yes this beast of a network definitely needs to get its shit together and pull some impressive feats of engineering to outperform the competition, however we have the test of time and the creativity of the developers to thank for all of these future improvements. Slowly but surely we will get there. One step at a time.