Ethereum the second-largest cryptocurrency by market capitalization, after Bitcoin, and the most actively used blockchain in the blockchain ecosystem has been held back by its high gas fees for long now. But it seeks to remedy this with a new protocol upgrade called The Ethereum Improvement Proposal 1559, which is slated to go live in July, and it is said that it will significantly change Ethereum’s transaction fee model, according to the note.
“Aiming to lower the volatility of ethereum’s fees, EIP-1559 introduces a mechanism to burn some transaction fees, detracting from circulating supply and introducing deflation to the ethereum ecosystem. The impact on ether’s price could be like that associated with a bitcoin halving event,” Downing said.
The EIP-1559 upgrade proposes to use flexible block sizes instead of fixed block sizes as has been the norm in proof-of-work systems. To do this, EIP-1559 uses a two-tier system consisting of a base fee and tips.
The base fee will be payable in Ether, and its price will constantly change depending on the network congestion. The new proposal aims to keep the network utilization at 50% or below. If the network usage surpasses this threshold, the base fee will increase as well. This predictable pricing model is meant to remove the burden of setting the price from users and pass it on to be set automatically by wallet providers. The base fee would then be burned after collection, meaning that miners won’t be pocketing transaction fees anymore. This will make Ether a deflationary asset, propping up its price over time.
Tips are slightly different from the base in the sense they are not mandatory. And unlike base fees that have to be destroyed, tips are kept by miners. Under EIP-1559, blocks will not be completely full, providing miners the space to allocate transactions to users who would be willing to pay a premium to have their transactions included in the next blocks. However, miners do not have control of the fee structure and feel let down by the proposal.
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