What is EIP-1559?

Ethereum released the London hard fork upgrade in August this year. There was an upgrade which was a set of five Ethereum Improvement Proposals (EIPs). One of them was called EIP-1559 aimed mainly to increase the mining speed of its native currency Ether (ETH) and incentivizing it for its miners. A crucial aspect of the update was how it overhauled the transaction fee system (gas fee system).

EIP-1559 will change Ethereum’s fee market mechanism. Basically, EIP-1559 gets rid of the first-price auction as the main gas fee calculation. In first-price auctions, users propose a fix 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. In other words, nowadays, people have to bid for how much they would like to pay to have their ether transaction picked up by a miner, which can cost a fortune. Under EIP-1559, this process will be dealt with by an automated bidding system with a set fee amount that fluctuates based on how much congestion the network is occupied with.

Although EIP-1559 aims to strengthen the ecosystem of Ethereum, which is known for its smart contract capabilities that power DeFi, or decentralized finance, apps and NFTs, or nonfungible tokens, among other things, it isn’t probable that there will be much short-term impact on investors, according to Demirors.

However, in long-term, the proposal’s co-authors hope to make ether deflationary by decreasing the supply. This would be “greatly lucrative” for investors, according to Conner, especially “with all the recent talk of inflation in the United States.” It would give crypto investors an option to hold a deflationary asset.

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