Can ETH Become DEFLATIONARY? EIP 1559 Explained

so what is eap 1559 aka the fee burn proposal all about will it lower ethereum's gas fees and how can it make it deflationary we'll answer all of these questions in this video before we begin if you want to learn more about decentralized finance and the technology behind it make sure you subscribe to my channel you can also consider supporting us on patreon and joining our defy community let's start with what eips actually are eip stands for ethereum improvement proposal and is a common way of requesting changes to the ethereum network inspired by bitcoin improvement proposals bips an eip is a design document covering technical specifications of the proposed change and rational behind it the majority of eips focus on improving technical details of ethereum and they are not widely discussed outside of the core ethereum developers community eip 1559 is one of the exceptions this is because the proposal has some big implications when it comes to the eat monetary policy and client applications such as wallets eip 1559 describes changes to the ethereum fee model and it was put forward by vitalik buterin in 2019 to understand why we need this proposal in the first place let's quickly review how the current ethereum fee model works the current fee model is based on a simple auction mechanism also known as a first price auction the users who want to have their transaction picked up by a miner have to essentially bid for their space in a block this is done by submitting a gas price that they are willing to pay for a particular transaction the miners are incentivized to pick up transactions by sorting them by the highest gas price and including the most profitable ones first this can be quite inefficient and usually results in users overpaying for their transactions this model is also quite problematic when it comes to the wallets metamask for example allows the users to adjust their fee by choosing between slow average and fast confirmation time or by specifying a gas price manually less sophisticated users were unlucky enough to submit their transaction with a default fee just before a spike in a gas fees may end up waiting for the transaction to be confirmed for a long period of time this is of course not ideal from the user experience point of view this is also where eip1559 comes into play the proposal was made to accommodate these problems and it aims to achieve the following goals making transaction fees more predictable reducing delays in transaction confirmation improving user experience by automating the fee bidding system creating a positive feedback loop between network activity and the eat supply now let's see what the proposed change is all about eip 1559 introduces a new concept of a base fee the base fee represents the minimum fee that has to be paid by a transaction to be included in a block the base fee is set per block and it can be adjusted up or down depending on how congested the ethereum network is the next big part of eip 1559 is an increase in the network capacity achieved by changing the max gas limit per block from 12 and a half million to 25 million gas basically doubling the block size with the base fee and increased network capacity eip 1559 can build the following logic when the network is at more than 50 percent utilization the base fee is incremented when the network is at lower than fifty percent utilization the base fee is decremented this basically means that the network aims at achieving equilibrium at 50 capacity by adjusting fees accordingly to the network utilization eip 1559 also introduces a minor tip a separate fee that can be paid directly to the miner to incentivize them to prioritize a transaction this is very similar to the current mechanism where the miners can be incentivized by higher gas fees this feature is really important for transactions that take advantage of quick confirmation such as arbitrage transactions now let's go through a quick example to see how the eip-1559v model compares to the existing model during a period of high network activity before we do that if you made it this far and you enjoy the video hit the like button so this kind of content can reach a wider audience let's start with the current fee model imagine the minimum gas fee to be included in the previous block was 50 gray the network activity seems to remain the same so users start submitting their transactions with 50 gray trying to be included in the next block at the same time a new highly anticipated token is launched causing users who want to buy it to dramatically increase their bids now to be included in the next block the minimum required fee is 100 way if the network activity remains high for multiple subsequent blocks the users who already submitted their transactions with 50 gray may wait for their confirmations for a very long period of time in this case the block size is capped at 12 and a half million gas and the only way to get into a block is to bid higher than the other users let's go through the same scenario this time with eip 1559 in place in the previous block the 50 guy was the base fee and the network utilization was at 50 percent with most blocks using 12 and a half million gas half of the max gas limit the spike caused by the release of the new token results in users submitting their transactions with a higher minor tip seeing the high demand for the block space and a lot of transactions with high minor tips the miners produce a block that is at the max cap limit of 25 million gas this results in more transactions being included in a block but it also causes the base fee to be increased in the following block as the current block is 100 full if the network activity and demand for block space remain high the miners would keep producing full blocks increasing the base fee with each subsequent block at some point the fee would become high enough to drive off some of the users causing the network to start coming back to below 50 network utilization and lowering the fees in the subsequent blocks the base fee can increase or decrease by a maximum of 12 and a half percent per block so it would take roughly 20 blocks around 5 minutes for gas prices to 10x and 40 blocks to 100x in our example the second block would have a base fee of 56.25 way this example demonstrates how spikes in network fees can be smoothed out when eip 1559 is implemented another way of thinking about this model is to imagine that it basically swaps high volatility in the fee prices for volatility in the block size because the increments and decrements are constrained the difference in the base fee from block to block can be easily calculated this allows wallets to automatically set the base fee based on the information from the previous blocks to avoid a situation where miners can collude and artificially inflate the base fee for their own benefit the entire base fee is burned let's repeat this the base fee is always entirely burned the minor tip is always entirely received by the miner there is also one more important new concept known as a fee cap this can be said by users who would like to limit how much they want to pay for a particular transaction instead of just paying the current base fee transaction with a fee cap that is lower than the current base fee would have to wait until the base fee is lower than the max fee set in vcap to be included in a block the fee changes are also backward compatible the legacy ethereum transaction would still work under the new fee system although they would not benefit directly from the new pricing model changes proposed in eip 1559 have a lot of implications some of them quite severe less profit for the miners the miners in the current fee system receive both the block subsidy reward and the entire gas fee with the recent high gas prices caused by defy miners were able to collect more money from the fees than the actual block rewards even though historically block rewards were always much bigger than the extra fees collected from transactions after the changes in eip1559 are implemented the miners would only receive the block reward plus the miner tip this is also why most miners are quite reluctant when it comes to implementing the proposal suggesting to push the change to ease 2.0 another major implication is the change required by the wallets with eip1559 in place wallets don't have to estimate the gas fees anymore they can just set the base fee automatically based on the information available in the previous block this should simplify wallet's user interfaces the base fee burning also has major implications when it comes to the east supply this is also why eip 1559 is very often discussed by eth investors burning the base fee creates an interesting feedback loop between the network usage and the heat supply more network activity equals more eth burned equals less east available to be sold on the market by miners making the already existing eath more valuable burning the base fee basically rewards the users of the network by making their ether more scarce instead of overpaying miners the fee burning mechanism also sparked a few discussions about it becoming deflationary this would be possible if the block reward plus minor tip is lower than the base fee burned that would be the case for example during the recent d5 gas feed craze where the network was constantly under heavy utilization one potential drawback when it comes to burning the base fee is the fact of losing control over the long-term monetary policy of heath with this change it would end up being sometimes inflationary and sometimes deflationary this doesn't look like a major problem as the max inflation would be capped at around 0.5 to 2 percent per year anyway so will eip 1559 make gas fees much lower not really it will clearly optimize the fee model by smoothing these spikes and limiting the number of overpaid transactions but the main ways of lowering gas fees are still eth 2.0 and layer 2 scaling solutions it looks like eip 1559 would be a great change to the ethereum fee system this also seems to be the consensus within the ethereum community with the majority of people rooting for the change to be implemented there are still few challenges to overcome especially when it comes to making sure that miners can safely process bigger blocks without making the whole network more prone to denial of service attacks eip 1559 belongs to the core category of eips which means that the change affects the ethereum consensus and requires all the clients to upgrade at the same time from the timeline perspective it looks like eip 1559 could be implemented in the next hard fork after the berlin hard fork which is somewhere in 2021 the team leading the chart received funding from the ethereum foundation and from the eip1559 gitcoin grant most of the coordination work is done by thin baker depending on the timeline eip-1559 can be either implemented in both ethereum 1.0 and 2.0 or potentially only in ethereum 2.0 if there are some delays in place so what do you think about eip-1559 will it have any impact on the 8th price comment down below and as always if you enjoyed this video smash the like button subscribe to my channel and check out cinematics on patreon to join our defy community thanks for watching

Channel: Finematics

Views: 119,967

Keywords: eip 1559, eip 1559 ethereum, ethereum, eth 2.0, ethereum 2.0, crypto, eth, eips, fee burn, fee burn ethereum, defi

Id: MGemhK9t44Q

Length: 14min 39sec (879 seconds)

Published: Fri Nov 06 2020

Reddit Comments

[u/itsckomi]

Good video, I saved it for my friends to show them lesson

[u/dont_forget_canada]

This youtuber is pretty good, wish we could give him some more attention to be honest

[u/devboricha]

Flair as media

[u/[deleted]]

This guy is my go to youtuber when I want toi learn something about ETH or crypto.

[u/Bitcoin1776]

I thought it was to be implemented July, 2021. Is this incorrect?

[u/Altruistic_Bobcat_71]

Thanks for posting this video! Explains it so well