https://consensys.net/blog/quorum/what-is-eip-1559-how-will-it-change-ethereum/
EIP 1559
It’s not everyday that mainstream financial media outlets mention specific Ethereum Improvement Proposals (EIPs). EIP-1559 bucks this trend. One of the reasons is that in addition to simplifying Ethereum’s fee market, it also changes Ethereum’s monetary policy. However, there is a lot more to EIP-1559 than its meme as making Ethereum “Ultra-Sound Money.”
In this post we answer the main questions that Ethereum holders, dapp users, and developers have about EIP-1559, which will be included in the London Hard Fork in July. The upgrade will first go live on Ropsten, at block 10499401, which is expected to happen around June 24, 2021. Tim Beiko pulled together great resources as well if you want to dive deep into the topic.
EIP-1559 will change Ethereum’s fee market mechanism. Fundamentally, EIP-1559 gets rid of the first-price auction as the main gas fee calculation. In first-price auctions, people bid a set amount of money to pay for their transaction to be processed, and the highest bidder wins. With EIP-1559, there will be a discrete “base fee” for transactions to be included in the next block. For users or applications that want to prioritize their transaction, they can add a “tip,” which is called a “priority fee” to pay a miner for faster inclusion.
As an analogy to explain the base fee and tip, imagine the experience of using a ride sharing service app on your phone (e.g. Uber, Lyft, or Didi). You want to use this app to get a ride to go from A to B. The cost to go from A to B is the same, regardless of which driver picks you up (the base fee in EIP-1559). Now, imagine if you were able to add a tip to your driver, prior to getting on the ride. If your tip is higher than what other people at that time are offering, drivers will be incentivized to pick you up over other potential passengers not offering a tip.
This process is similar to your ETH transactions: you can set a tip for miners (the “driver” in the above example) to include your transaction in the next block (the “ride” in the above example). A higher tip means a greater chance of your transaction being included in the next block and therefore being completed.
The above diagram shows how the fee mechanism will work with EIP-1559. Currently, fees are paid to miners, who also receive the block reward of 2 ETH per block, plus uncle rewards. With EIP-1559, the base fee is burned, but a tip and the block reward still go to the miner.
No, this is not the intent of the EIP. As a side effect of a more predictable base fee, EIP-1559 may lead to some reduction in gas prices if we assume that fee predictability means users will overpay for gas less frequently. With EIP-1559, the base fee will increase and decrease by up to 12.5% after blocks are more than 50% full. For example, if a block is 100% full the base fee increases by 12.5%; if it is 50% full the base fee will be the same; if it is 0% full the base fee would decrease by 12.5%.
The ongoing movement of applications to rollups and Layer 2s will be what greatly reduce fees.
The idea is to make fees based on block demand more transparent for the user. Wallets like MetaMask will be able to have better estimates, and won’t have to rely much on external oracles since the base fee is managed by the protocol itself.
Wallets will provide predefined settings based on how urgent the transaction is for the user. With MetaMask, users will still have an option to set the priority of their transaction as “low” “medium” and “high,” based on previous block’s estimated usage, and the type of transaction.
The “tip” will be included as the overall “gas fee” that users see to submit a transaction. You will also be able to “edit gas fee” to increase or decrease the “tip” which is called a “priority fee.”