What Ethereum’s EIP 1559 means for miners

ethereum coin covered in coal

Date Published

03/18/2021

Ethereum’s EIP 1559 fee market overhaul has been officially scheduled for the London hard fork in July, marking one of the most significant updates to the network thus far – and one of the most hotly contested.

Developers met in early March and ultimately made the decision that will greatly impact the world’s second-largest form of cryptocurrency by market capitalization, which has seen record performance over the past several months.

Here is a breakdown of what EIP 1559 aims to accomplish and how it will impact both users and miners alike.

What is EIP 1559?

EIP stands for “Ethereum Improvement Proposal,” and in this specific instance, EIP 1559 aims to modify the blockchain and transaction fee schedule to improve the network’s user experience.

Typically, when dealing in crypto on a traditional blockchain, there is a fee that tells you how much you need to pay in order to complete your transaction. This fee goes entirely to the miners and is in most cases an approximation based on several factors, such as how many other people are also trying to send crypto at that time.

Some say this structure has made it difficult for the network to scale ahead of Ethereum 2.0, and that it also makes it difficult for first-time users to confidently pay a fair fee for their transactions.

To combat these complaints, developers are implementing a base fee under EIP 1559 – a bounded range that will more clearly define how much you need to pay to complete a transaction. Rather than going entirely to miners, this new fee will go directly to the network with an optional tip that users can pay to miners. The base fee is determined using an algorithm, which developers and users hope will make it easier to pay a fair price for transactions.

But for miners, this change appears to be causing widespread discontent.

Developers vs. Miners

Over the past couple years, even the idea of an update like this pitted developers and miners against one another. Now that it is happening, the two parties will have to reckon with the fallout.

The update has gotten a lot of support from Ethereum application creators and users, as it is seen as being quite difficult right now to select an accurate and fair transaction fee.

But a large majority of Ethereum miners and mining pools are against the proposal for obvious reasons.

In a cryptocurrency transaction, there are essentially two rewards for miners – the block reward and the transaction fee – the latter of which has been a major profit-driver for miners thus far. In February of 2021, Ethereum miners earned $1.3 billion in revenue, more than 50% of which came from transaction fees alone.

Now, this fee structure is going away and is being replaced with an optional and much smaller “tip” that users can decide whether they want to pay to miners or not. Any tips that do get paid will be much smaller than the normal transaction fee that has been traditionally paid entirely to miners.

Ethereum miners stand to lose a lot of money from the update, and some mining pools have even launched marketing campaigns against it. There have been talks of hard-forking the network as a result, or of a future 51% attack (though this seems unlikely as miners would likely have more to lose by doing so).

What will this mean for users and miners?

With the increasing popularity of the Ethereum network (thanks largely to the buzz of DeFi and NFTs), there are many questions as to whether this update will indeed make the platform more user-friendly or if it will simply serve as an incremental milestone without much impact.

What is important to note is that this update will not necessarily lower fees – but it will put them within a more clearly bounded range. Right now, difficulty knowing how much to spend on a transaction fee can result in overspending, which results in more money for miners. The update is aimed at helping users more accurately estimate how much they need to pay for a fee, but transaction fees will still be high relative to a year ago.

For miners, this shift signifies a serious decrease in profitability from Ethereum, as well as the need to diversify and to look elsewhere in order to maximize revenue.

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Date Published

03/18/2021

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