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Sunday, August 1, 2021

What Is EIP-1559? And How It Affects Ethereum Mining?

Ethereum is one of the most important cryptocurrencies in the market! 

It is the second-largest cryptocurrency in the world in terms of market capitalisation, i.e. $315.4 billion.

eip-1559

However, it is not the only thing Ethereum is popular for. This cryptocurrency platform is known for making drastic changes and improvements in the crypto world. 

First, it was the introduction of Initial Coin Offering (ICO) in 2017, followed by the launch of Decentralised Finance (DeFi) in 2020. 

However, in 2021, Ethereum has again become the talk of the town in the crypto world with the introduction of EIP-1559.  

It is going to be one of the biggest change in the Ethereum blockchain and will greatly affect Ethereum mining

In this article, we will explain more about EIP-1559 and its impact on ETH mining. 

What is Ethereum Mining?

Before we move on to EIP-1559, you need to know what exactly Ethereum mining is and who are Ethereum miners. 

Ethereum works on a decentralised blockchain technology. The transactions on this platform need to be verified by the miners. 

Miners are individuals who use a computer to solve complex crypto math problems in order to add the transactions in a block. The transaction will only be completed if it is added to the block.

The entire process of solving the problems and verifying the transactions is known as mining. 

Miners play a vital role in the functioning of the Ethereum network. Without miners, the entire platform will come to a standstill.

Because of this reason, miners get a reward in return for verifying the transactions on the Ethereum blockchain. It is known as a mining reward. Ethereum miners get block reward as well as transaction fees.

However, with the introduction of new EIP, miner’s earnings will be decreased by 30%. It is going to have a significant impact on ETH mining as most of the miners are not happy with this policy.

What is EIP-1559?

EIP-1559

EIP stands for Ethereum Improvement Proposal. Anybody who is a part of the Ethereum community can come up with different proposals to improve the platform. 

The proposal is discussed within the community, and if they approve it, the necessary changes are made to the platform. 

There have been many EIPs in the past. However, none of them was as big and impactful as EIP-1559.

As per the new EIP, there are going to be two major changes in the Ethereum platform. 

  • Change in Network’s Fee Structure: Currently, Ethereum follows the first price action model in which the users who offer more fees get their transaction accepted quickly by miners. Miners receive a gas fee in order to verify each transaction. During the congestion period, users have to pay very high gas fees to get their transaction added to the block. As per the EIP policy, the gas fees will be divided into two, i.e. base fees and tip. The base fee will be fixed by the network, and the miners will receive only the tip for verifying each transaction. This change will help the network to remove price disparity and increase the transaction speed.
  • Change in Monetary Policy: Apart from changing the fee structure, there will be a change in the monetary policy as well. Miners will only receive the tip provided by the client. The base fee will be burned in the process of mining Ethereum. It will reduce the total supply of Ethereum, thereby changing the monetary policy from inflationary to deflationary. It will increase the demand as well as the price of ETH.

These changes were first proposed in 2018 by one of the core developers of the platform, i.e. Vitalik Buterin. He is the co-founder of the Ethereum platform. 

However, this idea gained traction on 5th March 2021, when the core developers of Ethereum approved the proposal. The changes in the platform will be implemented from July 2021.

Impact of EIP-1559 on Ethereum Mining: 

The main reason to implement EIP-1559 was to improve the Ethereum platform and network for the community. However, the changes are more in favour of Ethereum users.

It will increase the transaction speed, make transaction fee estimation easier, reduce inflation, decrease network congestion and make the network more secure.

However, it will have a negative impact on Ethereum mining and miners as it will reduce the rewards. Here is how it will impact ETH mining.

  • Less Profitable Ethereum Mining: 

EIP-1559 have made ETH mining less profitable for the miners. Miners will earn 30% less profit in mining Ethereum with the new plan as the base fee is burned. 

Ethereum mining
  • Change in Transaction Fees:

It will directly affect the transaction fees. In order to verify Ethereum transactions, miners receive block reward + transaction fees. However, now the transaction fees will be automatically adjusted by the network. It will be divided into base fee and tip provided by the client. Miners will only get the tip as the base fee will be burned. It will affect their revenue. 

  • Low Gas Fees for Mining Ethereum:

The gas fee, which was based on the first price auction model, will now depend on the congestion in the network. During high congestion, the gas fee will be increased; however, during low congestion, it will be reduced. 

  • Increase in Block Size:

As per the new changes, the block size will be increased from 12.5 million gas to 25 million gas. As there is more block space, the fees will be automatically adjusted. With more space, clients will not offer many tips as there are high chances of getting the transaction added to the block space. It will again affect the revenue of miners.

  • Burning Base Fee:

As per the proposed plan, the transaction fee or gas fee will be divided into base fee and tip. Gas Fee = Base Fee + Tip. With the new policy, miners will only get the tip or inclusion fee as the base fee will be burned to complete the transactions. Miners will earn less profit from ETH mining.

  • Low Miner’s Tip for Ethereum Mining:

Clients offer tip along with a base fee so that miners will add their transaction to the block first. However, now the miners will only get the tip along with the block reward. Clients will only offer more tips during congestion. As the tip amount will be less, it will again affect miner’s profit.

  • Division in Ethereum Mining Industry:

Because of the new EIP, the entire mining industry is divided. While some mining pools are in support of this proposed policy, others are against it. F2Pool supports this policy as it will make Ethereum more attractive to new users, which will benefit the miners in the long term.

  • Possibility of Ethereum Chain Spilt:

As Ethereum miners have divided, there is a great possibility of an Ethereum chain split. If the miners get support from users, there will definitely be a split in the network. However, most of the users are in support of the change, so miners will have no other option but to go with the policy or move towards other digital coins. 

  • Mining Other Coins:

As ETH mining has become less profitable, most of the miners are moving towards other crypto coins like ZCash, Monero, Grin, RavenCoin, etc.

While EIP-1559 might be beneficial for Ethereum users, it is not really profitable for Ethereum miners. Small scale miners who use gaming computer to mine Ethereum will not be able to bear the cost. However, there is a possibility that Ethereum mining will become profitable in the long run. 

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