EIP 1559 for beginners
With the release of EIP 1559 being imminent. I've decided to write this short article to help beginners understand what it is, and how it helps.
Ethereum Improvement Proposal (EIP 1559) in a general sense was a proposal introduced around 2 years ago to change the fee structure and token economic (or tokenomics) of ethereum to make it more efficient. The two main aims are to introduce fee burning mechanisms and to improve the overall User Experience (UX) on ethereum.
Let’s start with the burning mechanisms, people commonly say that gas fees will be reduced which is technically true but not a guarantee. With EIP 1559 the fee that is burned is a base fee (a predetermined fee which has to be paid in order for your transaction to be eligible for validation) and this fee when burned is forever gone from the ecosystem. EIP 1559 does not have a switch which instantly reduces gas fees. Accomplishing that is a scalability issue which is being tackled in many different ways which I will discuss in another article. But, the Improvement aims to make gas fees more predictable which in turn will make the system more efficient which thereby may reduce gas fees. However, gas fees are a function of demand & supply, If demand exceed supply then gas fees will sharply increase and vice versa. This burning mechanism essentially reduces the rate of inflation of $ETH and could potentially make it deflationary in the future. This is tremendously bullish for $ETH because it brings in the scarcity element which inevitably makes it more valuable especially when looked at as a long term Hodl.
Improving the economic structure, fee structure, and burning mechanisms in turn improves the overall user experience. Keeping the attention of users is ofcourse essential to attract more and more developers to use ethereum as their preferred layer 1 blockchain. A major potential issue (though unlikely to occur) is the event of miner collusion. The burned base fee could have been distributed as a token reward incentive for the miners but is instead burned which may lead to malicious collusion.
I hope you enjoyed this short piece on EIP 1559, and I hope it helped you understand the proposal better.
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