What is EIP-1559?

Ethereum Improvement Proposal (EIP) 1559 is an upgrade that happened on August 5, 2021 to change how Ethereum calculates and processes network transaction fees (called "gas fees"). The upgrade made Ethereum transactions more efficient by using a system of block-based base fees, and sender-specified max fees, rather than bidding on gas prices to more evenly incentivize miners in periods of high or low network congestion. It was packaged with the London hard fork. Four other EIPs will join EIP 1559 in London.

  • If you’re trading Ethereum (ETH) tokens on Coinbase, EIP-1559 will not affect your transactions.

  • If you’re attempting to process a transaction directly on the Ethereum network, EIP-1559 will change the way the Ethereum network calculates and processes your network fee.

Under the original Ethereum gas fee system, users bid a random amount of money to pay for each transaction. When the network becomes busy, this system causes gas fees to become high and unpredictable.

Under the new system, gas fees will have two components – a base fee and a tip. The base fee will be a standard charge that all users will pay. It will be calculated by the network based on network traffic. The tip will be an optional extra payment that users can pay to speed up their transactions.

EIP-1559 also requires that the network burn all Ether tokens used to pay base fees. This procedure will reduce the total supply of Ether tokens, making Ether more scarce and therefore more valuable.

Currently, Ethereum gas fees operate on a simple auction system that is unpredictable and inefficient. When an Ethereum user submits a transaction to the network, the user can pay any amount as a gas fee. Ethereum "miners," Ethereum users whose computers validate network transactions, can process transactions in any order they choose. Naturally, miners prioritize those transactions with the highest gas fees. 

This system is similar to the way ride-sharing services calculate ride fees. When demand for rides is higher, prices go up for everyone who wants a ride. Similarly, when demand for Ethereum transactions rises, gas fees go up for everyone who wants to process a transaction. This dynamic pricing system helps control demand for limited resources, whether those resources are car rides or Ethereum miners. 

However, a problem arises when the Ethereum network becomes busy, such as when many users are trying to play a hit game or trade on a new decentralized cryptocurrency exchange. In that case, the current gas fee system can result in users trying to push their transactions through the congested network by paying absurdly high gas fees. When this happens, gas fees become unpredictable because users must guess how much to pay for a transaction.

As Ethereum has gained new users, the network has become more congested, gas fees have become more volatile, and many users have inadvertently overpaid for their transactions. As a result, the Ethereum gas fee system has become steadily less efficient. EIP-1559 attempts to correct this inefficiency.

EIP-1559 changes gas fees into a system with two components – a "base fee" calculated by the system that all users will pay for regular transaction speed, and an optional "tip" that users can pay to speed up their transactions. 

  • Base fee: The base fee will be a "standard processing" fee that all users will be required to pay for an Ethereum transaction. The Ethereum network will automatically calculate the base fee. When Ethereum network traffic is heavy, the base fee will increase, but this increase will be predictable and will be the same for all users, unlike the current system, in which gas fee increases are unpredictable and require users to guess how much to pay.

  • Tip: The tip will be an "express processing" fee that users can pay to speed up their transactions. This fee will be optional and determined by the user. 

This fee system is similar to a delivery service. When a person ships a package with a delivery service, they can pay a lower fee for regular delivery or a higher fee for express delivery. During busy times, like the holiday season, the delivery service may increase the standard delivery fee, but that increase will be set by the delivery company and will affect all customers equally. At any time, customers who want standard delivery can pay the standard delivery fee, and customers who want express delivery can pay an extra fee. 

Similarly, once Ethereum implements EIP-1559, users who want regular transaction processing speed can pay the base fee, and users who want faster transaction processing speed can add a tip. This system differs from the current Ethereum gas fee system, which has no standard fees, forcing users to guess how much to pay.

On Ethereum, miners collect transaction fees as compensation for contributing the computing power that the network needs to process transactions. Under the current system, miners receive 100% of all transaction fees. EIP-1559 changes this system to require that Ethereum burn all Ether tokens used to pay base fees. Under the new system, miners will only receive the tips that users choose to contribute to accelerate their transactions.

In the long term, by requiring the network to burn Ether tokens every time a user pays a base fee, EIP-1559 will cause a steady decline in the total supply of Ether tokens in circulation. This supply reduction will make Ether tokens rarer and therefore more valuable.

EIP-1559 changes the transaction fee market for Ethereum from a first-price auction to a fixed-price sale. Transactions specify the maximum gas price they are willing to pay, as well as the portion of that gas price they are willing to pay to miners. The portion not paid to miners is burned. The Ethereum network intends for EIP-1559 to have the overall effect of stabilizing gas prices from block to block. Coinbase will gradually roll out the new network fee structure to users.