What is EIP 1559?

First proposed by Vitalik Buterin in 2018, Ethereum Improvement Proposal 1559 (EIP-1559) represents an overhaul of the fee market in Ethereum. The biggest change is the introduction of fee 'burning,' which has the effect of reducing Ethereum's inflation rate. From the perspective of a fee-paying user, EIP-1559 does not have a significant impact. In other words, the cost per transaction for users is basically unchanged. EIP-1559 was included in the 'London' hard fork which was completed on August 5, 2021.

Table of Contents

  1. How fees work in Ethereum
  2. The changes made by EIP-1559
  3. EIP-1559 stats

How fees work in Ethereum

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?

The changes made by EIP-1559

Prior to the implementation of EIP-1559, Ethereum's fee market worked on the 'first price auction' model. So, if you wanted your transaction to be picked up by miners sooner, you just attached a higher fee.

EIP-1559 replaced 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, in the new system the base fee is 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.

EIP-1559 stats

Since implementation in August of 2021, EIP-1559 has had a material impact on the inflation rate of Ethereum. As of July 2022, EIP-1559 has resulted in the burning of approximately 2.8 million ETH. Given that over the same period 5.5 million ETH were issued, Ethereum's overall supply growth (ie. inflation rate) was approximately 2.2% in the first year after EIP-1559. Without EIP-1559, that rate would have been nearly double. By comparison, over the same period, Bitcoin's inflation rate was approximately 1.7%.

You can track the rate of EIP-1559 fee burning at watchtheburn.com and ultrasound.money.

Read more: What is Ethereum 2.0?

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