What is EIP-1559?

Why was EIP-1559 proposed? 

EIP-1559 has been designed to solve the issue of gas management for users. Currently, when making a transaction on Ethereum, users 'bid' on the blockspace to get their transaction passed. That has resulted in two issues. 

1. Wallets can only recommend the amount of gas required to get transactions passed. If the amount suggested falls below the amount needed, the transaction can fail or get stuck. Both of these result in users wasting money on gas. The recommended amount can also be too high, wasting users' funds.
2. Users with more funds can outbid others on gas. That prevents users with less funds from making transactions during network congestion. 

This issue cannot continue as the Ethereum network grows. That is why EIP-1559 was initially proposed. 

Understanding EIP-1559 

As EIP-1559 will be implemented in July 2021, let's explain how it works and what this means for Ethereum. 

EIP-1559 has 4 key objectives, and they are:

• Creating an algorithmic gas fee model - the algorithmic gas fee model tackles the issue of gas management. Each block will have a 'base fee'. That is the minimum fee needed to get a transaction passed and adjusts to how busy the network is. Additionally, this base fee will be burnt (destroyed) and isn't refundable changing how Ethereum works. This change makes gas prices predictable for users. With EIP-1559 the fee quoted is the market rate and users can decide if they are happy with the price before making their transaction. There is no need to worry about stuck transactions or overpaying for gas!  If the transaction is urgent, you can still push it ahead of others by 'tipping' miners.  With transaction fees removed after EIP-1559, it should drive the price of ETH upwards as it becomes a deflationary asset.

if capped-supply gold is sound money

decreasing-supply ether is ultra sound money pic.twitter.com/Iq2bgBzcqm

— Justin Ðrake 🦇🔊 (@drakefjustin) May 24, 2021

• Flexible block size - currently, the fixed block size limits the capabilities of the Ethereum network. That is because it limits the number of transactions that can happen when the network is busy. To solve this problem, EIP-1559 introduces flexible blocks.  Flexible blocks allow for the network to adjust to how active the network is. This is done by increasing or decreasing the block size. If it is busy, then the block size will increase so that more transactions can occur. The same will happen if the network isn't utilized, averaging out over time. In theory, this will reduce fees as the network can adjust to market demand.
• Perpetual block subsidy - first-generation blockchains like Bitcoin have a deflationary monetary policy. That means the number of coins issued will decline until there are no more coins available. When this occurs, network security becomes dependent on transaction fees. That model is incompatible with EIP-1559 as this transaction fee is burnt with every transaction made. With EIP-1559 decoupling transaction fees from network security, miners are incentivized with an uncapped supply of ETH. That allows for new coins to enter without inflating the supply.
• Prevent economic abstraction - before EIP-1559, users could pay their transaction fees in assets other than ETH. They would do this by paying the miner directly. EIP-1559 removes this possibility as every transaction will have its fees burnt. These fees will be in their ETH denomination too.  Miners can still push transitions ahead of others, but this would be at their expense. The issue still isn't wholly solved as miners can receive tips and this tip isn't burnt. But, it will be better than before.  

Will gas be reduced by EIP-1559?

This is a heated discussion within the Ethereum community. Some have argued that with the introduction of flexible block sizes and predictable pricing that gas will be lowered. While others have argued that the objective of EIP-1559 is to increase the usability of Ethereum and not reduce the price of gas. Arguing that the price paid for gas is merely a byproduct of network demand. 

EIP-1559 cannot guarantee lower fees, but what can is Layer 2 scaling solutions, sidechains and ETH 2.0 which is making great progress.

Further Resources

EIP-1559 GitHub 

EIP-1559 FAQ by the Ethereum Foundation

Bankless podcast on EIP-1559 with Hasu

The Ethereum Gas Report by Coinmetrics analysing whether gas prices will be lowered or not by EIP-1559