At block number 10,499,401, which is expected to be mined next Thursday, the Ethereum test network Ropsten will undergo a backward-incompatible upgrade dubbed “London.”
This is the first of three test network releases for London in the lead-up to a main network activation tentatively scheduled by Ethereum developers for mid-July. Included in London are five code changes, also called “Ethereum Improvement Proposals” (EIPs). In a blog post released Friday, Ethereum Foundation’s Tim Beiko said:
“[EIP 1559] introduces changes to the block header, adds a new transaction type, comes with new JSON RPC endpoints, and changes the behavior clients in several areas (mining, transaction pool, etc.). It is highly recommended that projects familiarize themselves with the EIP.”
Out of the five EIPs in London, EIP 1559 is arguably the most anticipated and controversial code change of them all. EIP 1559 introduces a minimum payment, also called a “base fee,” for sending transactions on Ethereum that dynamically adjusts based on network activity and demand for block space.
Since EIP 1559 was first proposed over two years ago in 2019, there have been several misconceptions about its use and impact on end users, miners and investors. The following are four common myths about EIP 1559 sourced from CoinDesk Research’s latest report, “The Investment Implications of EIP 1559.”
Myth 1: EIP 1559 is aimed at reducing high fees on Ethereum.
At its core, the aim of EIP 1559 is to make transaction fees less volatile and more predictable by creating an algorithmic model to automatically adjust costs by a factor of 1.125x at most per block.
Under the current blind auction-like system for determining fees on Ethereum, the costs for sending a transaction can skyrocket at a moment’s notice depending on the ups and downs of the crypto markets. Under EIP 1559, fees are regulated to increase and decrease based on the use of block space. If blocks are filled above a set “gas target,” the base fee will increase by 12.5% and vice versa.
These changes to the inner workings of Ethereum’s fee model are not expected to reduce transaction fees on Ethereum, however. The issue of high fees is primarily caused by limited network capacity to process transactions. EIP 15559 on its own will not affect how many transactions the network is able to handle at once.
Myth 2: EIP 1559 will make Ethereum’s monetary policy more predictable.
EIP 1559 introduces a fee-burning mechanism that will permanently remove coins from the total circulating supply of ether (ETH). The reason for burning the base fee rather than distributing them to Ethereum miners is to ensure there is no financial incentive for miners to artificially congest the network and keep the base fee high.
Because of this burning mechanism, EIP 1559 may strengthen a bitcoin-like narrative of limited supply to the investment case for ether. It is difficult, however, to predict exactly how much ether will be burnt over time given that the base fee dynamically adjusts according to network activity and demand for block space.
While EIP 1559 introduces a counterbalance against an ever-increasing ether supply, it doesn’t make Ethereum’s long-term monetary policy more stable. On the contrary, it introduces economic instability to the network by making it impossible to control what the total supply of ether will be over time.