In just ten days, Ethereum’s blockchain will go through its eleventh upgrade. This backward-incompatible update is called a “hard fork.” Unofficially named “London,” it has five EIPs: Ethereum Improvement Proposals. Each one features code changes that aim to improve and optimize the world’s second-biggest digital currency by market share.
Among the five EIPs, 1559 is specifically the target of much controversy among stakeholders. That’s because of its radical redesign of the Ethereum network’s fee market. Let’s discuss the changes EIP 1559 will bring.
A major argument against Ethereum being of value is that it has an unlimited coin supply. In contrast, Bitcoin, which is the world’s first and most popular cryptocurrency, has a capped and specific supply schedule. This is a crucial part of the cryptocurrency’s reputation as ‘digital gold’ among investors. EIP 1559 is set to change Ethereum’s course in this regard.
While it won’t put a supply cap on Ether, it sets a mechanism that curbs the overall growth of supply over time. It does so by removing a variable number of Ether tokens from circulation upon each transaction.
Starting June 8, Coindesk implemented an EIP 1559 simulation to see its effect on the trailing 365 days. According to its results, it would have burned almost 3 million Ether tokens, which means a total reduction of Ether supply growth by 75 percent during that period.
In addition to developing a Bitcoin-Esque concept of limited supply for Ethereum, EIP 1559 is predicted to improve transaction waiting times and eliminate fee-market uncertainty that can negatively affect the rate at which developers and users adopt dapps.
Lastly, EIP 1559 will establish Ether as a method of payment to rely on Ethereum’s computing resources and engaging with its network’s wide system of dapps. It will require that transaction fee payments on the network be made exclusively in the network’s own cryptocurrency.
Of course, EIP 1559 does come with its fair share of risks as well. The biggest risk of this upcoming upgrade is the proposed changes it will make to the reward dynamics surrounding payouts to miners, who will suffer the most. Once EIP 1559 is activated, miners will receive smaller earnings for their operations.
Rather than making the entirety of transaction fees, miners will only make money via tips from users. This is done through the optional feature of an ‘inclusion fee’ that users electively pay for their transactions to get prioritized.
Simply changing the reward dynamics won’t have an impact on Ethereum’s capabilities to process computations. However, there is a risk that unhappy miners will exit the network, threaten to sabotage it, or work on a competing chain instead. If a large number of Ethereum miners leave the network, network security and block times risk being heavily affected.