ETHEREUM

    Staying on the (b)right side of history: EIP-1559

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    25 February 2021. Written by JK

    We would like to present detailed clarifications of our support of EIP-1559’s critical improvements to the Ethereum ecosystem.


    Chun Wang, founder of stakefish and co-founder of F2Pool recently presented an ETHDenver talk on the importance of miners embracing an update to Ethereum’s transaction pricing mechanism, EIP-1559. He declared F2Pool’s official support for EIP-1559 during this session. Following this announcement, we would like to present detailed clarifications of our support of EIP-1559’s critical improvements to the Ethereum ecosystem.

    The state of Ethereum usage

    It’s no secret that Ethereum has been in hyper growth mode for the past 2 years. Many thought that the 2017 ICO mania was just a temporary craze. However, in hindsight, that was just a glimpse of what the future of Ethereum held. After the crash of early 2018 and throughout the bear market that ensued, relentless builders were unfazed and had been building DeFi, DAOs, NFTs, and so much more. Starting from early to mid-2020, people started taking notice and flocked back to using applications built on top of Ethereum. As a result, we can see the number of on-chain activities coming back in full force and exceeding the peak levels of 2017.

    Ethereum Transactions Historical Chart

    Source

    Consequently, getting transactions included on Ethereum has become more valuable. Block space demand, which can be indirectly proxied through gas prices, has skyrocketed. There is no end in sight when we’ll ever see gas prices falling to sub-10 gwei levels.

    Ethereum Gas Price

    Source

    Bringing these gas levels down to a manageable level is not a core topic to be explored in this post. We have Ethereum 2.0 which is being actively worked on as the long term solution to resolving the scalability issue. We have Layer 2s that are readily available or close to launch that will solve scalability for applications until Ethereum 2.0 is fully ready. This post intends rather to discuss how we can provide a better experience for users and builders. The stakes have never been higher for getting transactions included.

    Estimating gas prices on Ethereum has consistently improved over time, but this has always been more of an art than science. During highly volatile times, new yield opportunities, interesting NFT or token sales, or BTC and ETH price volatility, gas becomes notoriously difficult to predict. The price of this volatility and unpredictability is paid by users and applications as they wait longer than desired times to see their transactions succeed and get included in blocks. In worst case scenarios, their transactions run out of gas and waste precious ETH.

    Queue EIP-1559 to the rescue

    There are numerous articles and resources (EIP-1559 proposal, Deribit EIP-1559 Insights, Bankless Fee Market notes, Vitalik comments) available today to learn more about EIP-1559. To provide a brief overview, the core of the proposal aims to change how gas is paid to miners. Currently, transactions compete in the mempool to be included based on a first-price auction. Miners will include higher gas paying transactions available in the mempool.

    With the introduction of EIP-1559, gas will have two components: BASE FEE and TIP. The BASE FEE is the minimum price users will have to pay to have their transactions included in upcoming blocks. The BASE FEE paid gets burned and adjusts higher every block if blocks include more than a targeted limit of 12.5M gas. There is a hard cap of 25M gas per block. Transactions can also include a TIP that is paid directly to miners. The TIP serves as an additional incentivization for miners. Once a hard cap of 25M gas has been reached, the TIP will help miners sort through transactions similar to how the first-price auctions work today.

    While there are a few advantages to EIP-1559 that are discussed by experts, we want to highlight the one we deem the most important: improved user experience. For applications and users, EIP-1559 will create more predictable gas estimation. They can easily observe the BASE FEE of previous blocks and accurately estimate how to get transactions included rather than submitting transactions with gas prices that are higher than current levels in the hopes of getting included.

    EIP-1559 coordination efforts have been largely led by Tim Beiko. He is a known and vocal proponent of the proposal, but has been doing his best to include dissenting voices. According to his sober assessment, there are still some roadblocks ahead in order for EIP-1559 to be ready from a technical standpoint (Tim Beiko’s readiness checklist). The earliest expected activation time for EIP-1559 is July 2021 when the London hardfork is expected to occur.

    These are the known facts around EIP-1559. Now, let’s move onto exploring the discussions around the proposal and why we believe the proposal should be supported.

    Contending EIP-1559

    The largest voice of dissent has come from the mining community. It makes sense that miners are contending EIP-1559 since it leads to actively burning transaction fees. Elevated gas prices have proven to be a large source of revenue for miners and the proposal seems to actively take this away. There hasn’t been sufficient economic analyses conducted on how revenues would look like for miners in a post-EIP-1559 world. It’s incredibly challenging to set up a mining operation and the uncertainty of transaction fees throws another wrench in planning out the future. Many mining pools as well have come out publicly to disapprove EIP-1559, most notably, our peers at Sparkpool and Ethermine.

    The current contention around the proposal shows the existing coordination problem. It would have been great if this topic had been more robustly discussed well in advance. There is no single one party at fault for this. Our ecosystem needs better outreach from the core team working on improving Ethereum and then for us miner and mining pools to better voice our struggles, difficulties and suggestions. However, we need to work with what we have so far and make decisions based on the facts laid out in front of us.

    Why we support EIP-1559

    Ethereum is an ecosystem with numerous stakeholders, each contributing in their own ways and paving the way to where it stands today. Ethereum core contributors and client teams have paved the way as a highly expressive blockchain after Bitcoin in 2014-2015. Miners have taken a leap of faith with this earlier version of Ethereum and helped secure it, even when no applications or developers were building on it. Miners have played a critical role in bootstrapping Ethereum’s early security and subsequently attracting developers to its ecosystem. Now, the ecosystem has thousands of applications and builders actively using Ethereum. The cycle has now shifted where the builders and users are helping drive value to ETH and solidifying Ethereum’s leading position in the world of decentralized applications.

    Miners have benefited from this increasing usage of Ethereum. Despite block rewards dropping from 30,000 ETH daily in 2016 to 13,000 ETH daily today, on a fiat basis, miners’ block reward revenues have increased from $300,000 daily (roughly assuming $10 per ETH) to $23.4M daily (roughly assuming $1,800 per ETH). This doesn’t take into account the MEV (miner extractable value) opportunities that have become available thanks to the rise of DeFi (decentralized finance). The users and applications on Ethereum are now asking to improve the network through enabling EIP-1559.

    Historically, we have already been given a costly lesson on the ramifications of not siding with the core users and contributors. After The DAO hard fork, key developers and core contributors have consistently built on the current Ethereum, helping it thrive and grow to its state today. Whereas Ethereum Classic, which remains an evolving ecosystem of its own today, has largely trailed Ethereum in terms of usage and application traction. Today, the general community along with core developers are siding with evolving Ethereum to include EIP-1559. It is important to side with the users and core contributors.

    Another reason we believe EIP-1559 is necessary is because of market expectations. There is a high likelihood that EIP-1559’s inclusion has been priced in today’s ETH price. Most community members, including investors, have positive feedback for EIP-1559 and expect this to be in play. Accordingly, this expectation is likely already reflected in today’s market prices. If the proposal fails to be implemented, the likely effect on short-term ETH prices will not be favorable as ETH holders account the new no-action on EIP-1559 into their thesis for ETH. The unfavorable price action might set off a sequence of events leading to further deleveraging both on centralized and decentralized financial markets. Eventually, the miners will also be impacted as their revenues are dependent on ETH prices.

    We are still open to hearing more opinions on EIP-1559. We will always keep an open mind and will happily engage in productive discussions. So far, the only counter arguments have been focused on short-term miner revenue loss. Therefore, for now, we are in full support of the proposal and will help move this effort forward. We hope miners and mining pools will join our journey and stay on the (b)right side of Ethereum’s history.

    Written by JK

    JK

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