Ethereum EIP 1559 started actions to fix loopholes, miners don’t agree

One and a half months after the Berlin Hard Fork on Ethereum, developers have fixed a loophole that will now allow the EIP-1559 to be more transparent.

EIP-1559, the London Hard Fork is set to happen in mid-July and burns some ETH spent on processing transactions instead of giving it to miners. This proposal aims to reduce the Ethereum transaction fees and the volatility that comes with it.

Summary

  • The Ethereum Improvement Proposal will be packaged with the London Hard Fork regardless of the mining industry discontent. Another five EIPs are likely to join EIP 1559 in London.
  • “Because the fields in 1559 are maximums, you could abuse this, not actually pay those huge gas values, and spam the network,” Ethereum core developer Tim Beiko tweeted Friday.
  • Therefore, to close this loophole the developers implemented a solution proposed by Swende: four lines of codes that capped transactions at a limit of 2^256, a widely used cryptographic hash function that also underpins Bitcoin

 

“Because the fields in 1559 are maximums, you could abuse this, not actually pay those huge gas values, and spam the network,” Ethereum core developer Tim Beiko tweeted Friday.

Therefore, to close this loophole the developers implemented a solution proposed by Swende: four lines of codes that capped transactions at a limit of 2^256, a widely used cryptographic hash function that also underpins Bitcoin.

Martin Holst Swedne is an Ethereum core developer who worked on EIP-1559 and placed no limit on the maximum amount a user can place in order to “tip’’ the miners and speed up its transaction.

Before the change, someone could insert a very high amount to overwhelm the network even if they did not have the funds to pay for the tip they selected. With the new upgrade, users can insert an amount that is actually held by them and they can afford paying it.

What is EIP-1559?

EIP is a proposal to reform the Ethereum fee market. Instead of all the short-term volatility in demand for transaction space within a block translating into volatility in transaction fees, some of the volatility instead translates into volatility in the block size.

The Ethereum Improvement Proposal will be packaged with the London Hard Fork regardless of the mining industry discontent. Another five EIPs are likely to join EIP 1559 in London.

Traditionally, the user sends a transaction fee to a miner for a transaction to be included in the block. That transaction fee also known as gas fee will now be sent straight to the network itself as a sort of burn called basefee with only an optional tip paid to miners. The burnt fee is algorithmically set as well, ostensibly making it easier for users to pay a fair fee.

Overall the proposal has been very exciting for Ethereum’s users and creators with very large support since they believe it is difficult to select the right amount of gas fee. On the other hand, miners have been gathering in opposition against the proposal as it progressed toward mainnet[1].

According to Coin Metrics, the total mining revenue until February 2021 was $1.3 billion with 50% coming from fees.

[1] Mainnet is the term used to describe when a blockchain protocol is fully developed and deployed, meaning that cryptocurrency transactions are being broadcasted, verified, and recorded on a distributed ledger technology (blockchain).

 

Mining pools against the EIP 1559

 

A 51% attack on the Ethereum network could censor transactions using EIPs framework and this is the biggest fear of all. Many believe that successfully using a 51% attack on Ethereum would likely decrease its value however three 51% attacks on Ethereum Classic suggest that this is not true.

What is a 51% attack?

A 51% attack on a blockchain can happen when a group of miners that control over 50% of the network’s mining hash rate, start interrupting the recording and creation of new blocks by preventing other miners from completing blocks.

What are the problems of transaction fees?

  1. First and second price auctions inefficiencies

The current approach suggests that transaction senders publish a transaction with a fee where miners choose the highest transaction fee, and everyone pays their bid. Well, this approach is well known in mechanism design literature to be highly inefficient. For this reason, highly complex fee estimation algorithms are required and even these algorithms can sometimes be too weak to solve leading ot frequent fee overpayment.

  1. The volatility of transaction fees and social cost transactions

Mature public blockchains that tend to have enough usage on their blocks have extreme volatility on their transaction fees. On Ethereum, minimum fees are around 2 gwei (10^9 gwfei = 1 ETH), but sometimes go up to 20-50 gwei and have even on one occasion gone up to over 200 gwei: https://etherscan.io/chart/gasprice. This creates inefficiencies because its absurd to suggest that the cost incurred by the network from accepting one more transaction into a block is actually 100x more when gas prices are 200 gwei than when they are 2 gwei.

 

EIP 1559 benefit

  • 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.
  • It makes gas prices securely measurable. Today, just looking at gas prices on chain and using them as an index is exploitable, because miners could include either very-low-fee or very-high-fee dummy transactions where the fee would go to themselves. But under EIP 1559, the BASEFEE can only be manipulated at high cost, as dummy transactions would require even the miner to pay fees (that get burned).

 

Disclaimer – I/we have no position in any stock mentioned. I wrote this article myself, and it expresses my personal opinions. I am not receiving any compensation for it, other than FDGT Academy. I do not have or had in the past any business relationship with any company that is mentioned in the above article.

Natalia C. - Junior Analyst at FDGT Academy

Natalia C. - Junior Analyst at FDGT Academy

I am a stock analyst/investor with prior experience and knowledge to BSc Accounting and Finance. After completing my degree and exposure to the accounting firms I decided that the direction I should choose is towards the Investment world. I completed my masters in Investment Management where it gave me solid fundamentals to build my career on. I have examined a lot of different aspects of investment, from REITS, derivatives, currencies, bonds, equity and hedge funds. I never stopped learning about the market which is why I can analyze and write articles for FDGT community always personally opinionated. My passion are green energy and electric vehicles stocks as a whole. I also had my share of analyzing the work form home stocks that are coming to take over in the upcoming years.

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