What is EIP 1559?

First proposed by Vitalik Buterin in 2018, EIP-1559 represents an overhaul of the fee market in Ethereum. It is expected to create downward pressure on the total supply of ETH, potentially turning ETH into a deflationary asset.

Space on each block in the Ethereum blockchain is limited to 12.5 million units of gas per block, and new blocks are mined approximately every 15 seconds. Since miners optimize for profitability, to incentivize miners to include your transaction in the next block, you must add an amount of ETH to your transaction. This constitutes the fee.

Read more: What is ETH gas and how do fees work in Ethereum?

Currently, Ethereum's fee market works on the 'first price auction' model. So, if you want your transaction to be picked up by miners sooner, you just attach a higher fee.

EIP-1559 replaces the first price auction model with a system that includes two types of fees: a base fee and an inclusion fee. The base fee is a per-block fee that all transactions must include, but it adjusts dynamically based on network congestion. When the network is busier, the base fee is higher. When the network is less congested, the base fee adjusts downward.

Importantly, rather than being claimed by miners and contributing to inflation, the base fee will be burned (destroyed). Assuming continued high demand for block space (ie. many people wanting to make transactions), this should have the effect of reducing Ethereum's inflation rate. According to some estimates, the new fee structure will result in an inflation rate of less than 1% annually, which would put Ethereum's inflation rate lower than Bitcoin's.

As for how the revised fee protocol will for affect the cost of making transactions from a user perspective, it's unlikely that the change will make a significant difference.

EIP-1559 was included in the 'London' hard fork which was completed on August 5, 2021.

Read more: What is Ethereum 2.0?

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