The Ethereum Improvement Proposal (EIP-1559) is a proposal for the Ethereum Protocol, which aims to solve the high transaction fees and inflation of Ether (ETH). According to industry insiders the controversial upgrade could be launched as soon as July.
Ethereum Improvement Proposal (EIP) 1559 has been the most talked-about upgrade for the network since ETH 2.0 was launched on Dec. 1, 2020. The EIP tackles the debilitating problem of high transaction fees which have strained the network in recent months.
Rising transaction fees
The surge in prices and a booming DeFi sector have put a huge demand on Ethereum. As a consequence, transaction fees have skyrocketed to record levels. According to BitInfoCharts, the average transaction fee is currently $17. This cost has peaked at $25 a number of times this month, however.
– “Why EIP-1559?” https://t.co/PgagWE0Vxw
– In five days, there’s an EIP-1559 community call to connect with miners https://t.co/fXnHNqwNL2
– EIP-1559 is most likely to launch in July in the “London” hard fork https://t.co/FOcHVqHDE2
— Ryan Berckmans (@RyanBerckmans) February 21, 2021
EIP-1559 introduces a mechanism to adjust the current auction process that determines transaction prices. This should have the effect of dynamically adjusting fees so that users pay the lowest bid for the block. Predictions Global founder and Ethereum developer Ryan Berckmans has suggested that the upgrade could be launched in July with the “London” hard fork.
Effects on Ethereum
While EIP-1559 will not have any direct impact on ETH prices, it does have an effect on the supply. The proposal would dynamically burn fees which should eventually reduce issuance over time when proof-of-stake gets underway. Berckmans added that there will also be scaling benefits for Layer-2 providers from the upgrade;
“One benefit of EIP-1559 is that it helps scale ethereum this year by enabling Arbitrum and Optimism to reliably get their security transactions into the next ethereum block. Since Arbitrum and Optimism are critical to scale ethereum this year, EIP-1559 is too.” – Ryan Berckmans
Earlier this month he suggested that the long-term effects of the upgrade could send ETH prices as high as $20,000 due to the fee burning going back to holders as opposed to profits going to miners.
Upward Pressure due to Fee Burning
Framework Ventures co-founder Vance Spencer suggested that the massive burning of ETH fees will create a “wealth effect tsunami”;
1559 season approaching rapidly
ETH has ~$5.5bn of fees (9% of ETH supply) per yr, assume 1559 burns half
$2-3bn of high growth fee burn gets valued by market at 100x
ETH wealth effect tsunami, ETH DeFi whales get even bigger
ETH whale chain wins
L2 is gravy https://t.co/dfwaYLmB6r
— Vance Spencer (@pythianism) February 22, 2021
There is the additional premise that miners currently need to sell their ETH to cover costs. Without this selling pressure, the asset has more room to grow in value under proof-of-stake.