In a previous article, we discussed the changes that will take place after EIP-1559 is implemented on Ethereum and the modification of the current gas fee system.
As explained, the main objective of EIP-1559 remains to lower gas fees for its users so that individuals are not overpaying for their transactions to go through. While this might be the major objective, there are other advantages to its application.
Slack Mechanism
In simpler terms, the slack mechanism of EIP-1559 will allow some blocks to be bigger during high congestion periods and other blocks to be smaller during periods with minimal traffic.
Previously, miners had the ability to mine unbounded blocksizes and it led to incentive problems. Now, with EIP-1559, miners will be discouraged to mine larger blocks if users are not paying high because the higher BASEFEE is not allocated to them.
Security enhancement of Ethereum
After issuance becomes low for most blockchains in the future, transaction fees are going to pay for security. This might be extremely risky if the block subsidy is over. Hence, the EIP-1559 model would be removing the network security dependence on transaction fees by incentivizing miners with a more reliable perpetual block subsidy.
A perpetual block subsidy is supposed to be a more stable income for miners, and over the long-term, it will instill better stability and security.
Disadvantages will stem down to miner’s sentiment
Under the EIP-1559 protocol, there is one condition where BASEFEE is zero – If the mined block is below 10M (i.e 10 million) gas. So, when BASEFEE is zero, the tip put forward by the user would entirely go to the miner. Hence, if miners decide to keep the mining below 10M at all times, they will continue to earn the entire fee.
However, it is important to note that a tip auction is only initiated when the demand for block space is more than the available supply.
While it is a legitimate concern and miners could trigger a soft fork if needed, such vector attacks haven’t been seen in the past with any blockchain. Hence, the threat is minimal, but the picture will only be clearer when EIP-1559 goes live.
Ethereum Monetary Policy: Does it change Ether’s value?
Functionality-wise, EIP-1559 has the potential to solve Ether’s transaction fee woes in theory. However, the implementation may also push Ether towards becoming a deflationary-attained asset.
The entire logic is driven by the BASEFEE. As mentioned earlier, the BASEFEE paid by the users will not be allocated to miners because the fee will undergo a burn proposal. Since the BASEFEE will always be burnt, the existing supply of Ether will become more valuable for investors.
However, it does come with certain limitations. To maintain positive miner sentiment, the block reward+tip should always be more than the BASEFEE, otherwise, miners will be underpaid. The burn proposal may also sometimes carry an inflation probability, but the hard cap on inflation is 0.5-2% on Ethereum, so that should be avoided.
Extra note
Considering EIP-1559 is supposed to reduce gas prices, it may not entirely do that. However, it will optimize the transaction fees paid by users and avoid any form of an overpayment which happened during the DeFi surge of 2020.
Keeping an eye on the horizon, the successful execution of EIP-1559 can emerge to be one of the most crucial updates for Ether’s value in the years to come.
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