Ethereum's Gas Fee Problem & EIP 1559

Ethereum's Gas Fee Problem & EIP 1559

Ethereum's Gas Fee Problem & EIP 1559

Every ETH user while transacting

Many Ethereum users who have recently made transactions might have complained about the exorbitant gas fees which clocked anywhere from $15 to $25 in 2021. In comparison the gas fee in March 2020 was a mere $0.1.

Ethereum gas crisis caused severe pain to the users of the network and which resulted in Vitalik Buterin putting forward Ethereum Improvement Proposal 1559 (EIP 1559) with following goals

  1. Lower Ethereum Gas fee & more predictable for users
  2. Reduce network congestion
  3. Improve user experience by automating fee bidding system
  4. Make ETH more scarce
  5. Create a positive feedback loop between network activity and ETH supply

What led to such a seismic shift in gas fee?

In the current fee model for Ethereum, users have to bid for space in a block through the gas fees in what is known as a “first-price auction”. If the network is congested, the competition for block space,the fees will spike higher which will cause users to input higher fees. This usually leads to users overpaying for transactions unnecessarily just to get them included in the next block quicker.

The Ethereum network is the most active and was the first platform to launch a smart contracting protocol enabling tokenization. Therefore,Ethereum has gained traction over the years. It has also exceeded Bitcoin as the most actively used network. According to a report by the Block Research, Ethereum processed over $835 billion of all stablecoin volumes , mostly in USDT, DAI  USDC.

At the same time DeFi was also gaining exponential adoption. The ETH network’s usage started remaining above 97% when ETH price began rising along with DeFi becoming mainstream.

Higher network usage provides higher revenue for miners. The DeFi craze of 2020 has caused a seismic shift within the crypto industry. Yield farmers and traders exploited most of this current trend to maximize earning opportunities, while the gas fee began rising.

At one point miner’s earnings from transaction fees exceeded the network rewards. If the trend persists the Gas fees will rise to unstable levels and will act as barrier for further adoption and might lead to people users dumping their ETH

How EIP-1559 plans on tackling the Gas Fee Problem

The entire idea of EIP 1559 is to smooth out spikes in network fees as well as making it easier for wallets to be able to calculate the fees more easily

EIP 1559 will replace Gas Fee by introducing what is known as a “Base Fee” to each transaction conducted on the network. This will be a minimum fee to be paid to send a transaction and it will increase or decrease depending on network usage.

The base fee is set per block and will change after each block depending on the network congestion. If the network usage is high, the base fee will increase for the next block causing transactions to become slightly more expensive. When the network usage is reduced, the base fee will be lowered again. 

EIP 1559 is also designed to provide an increase in the network capacity by changing the max gas limit per block. Currently, the max gas is set at 10 million GAS. With EIP 1559 implemented, this will increase to 20 million GAS.

Additionally, EIP 1559 will also introduce a miners tip. This is similar to the current model in which the highest fees are picked up by the miners first. However, in this scenario, the miners will pick up the transactions with the highest “tips” first.

In simple terms

“Under EIP-1559, ETH users making a transaction will submit their bids as usual,  and everyone pays the lowest bid(BASE FEE) as pre-decided in the block. The BASE FEE WILL NOT BE GIVEN TO MINERS as transaction fee instead it will be returned to network & IT WILL BE BURNED. Which means miners cannot manipulate the network for higher Gas Fees and extract more from users. An optional tip will be the source of revenue for miners.

How EIP 1559 improves Ethereum?

  • With EIP 1559 volatility will shift from Gas prices to block sizes, and Base Fee will be more predictable for users, hence a better user experience while making transactions.
  • Making ETH more SCARCE. This newly introduced BASE FEE instead of giving it to miners it will always be BURNED. Arguably this would help miners overall in a sense that it will be making ETH more SCARCE.
  • Burning of Base Fee means the removal of ETH in circulating supply, which makes it slightly more valuable. Under heavy usage of the network more ETH will be burned due to higher Base Fee making ETH more scarce. This will inherently lead to ETH price rise.

NOT everyone is HAPPY with EIP 1559

EIP 1559 is facing stiff resistance from MINERS, as it will immediately affect miners' revenue after removal of Gas Fee. Currently they receive Gas fees entirely along with the block rewards( block subsidy).

A Lot of new miners joined the mining industry with such attractive revenues. The total mining fees in February 2021 alone surpassed USD 1.3 Billion. Which was about 50% of their total revenue in FEB/
A removal of Gas Fees is definitely going to affect their revenue and drive investors mad.

Currently Mining Pools backed by miners are showing stiff resistance against London Hard fork and are showing their discontents with many anti-EIP 1559 campaigns launched by mining pool companies.
Many speculate that Ethereum network might face 51% attack due all this, which is unlikely since miners are also holders of ETH & 51% attack will only lead to ETH losing its value. 

What would happen after its implementation of EIP 1559? 


EIP-1559 is confirmed to launch this summer. What this means is that "issuance" which means new coins minted is going to be DRAMATICALLY lowered. To put it in perspective, the issuance rate right now is about 4.5% per year, the estimates for the issuance rate after EIP 1559 is implemented are .5 - 1%. 

Why does this matter? 

Let’s consider Bitcoin’s history for a quick reference. Where Bitcoin Halvening is a toned down version of what would happen in Cliffening. So bitcoin issuance halves every 4 years right? and from that we see the bull run begin and bitcoin goes on a rally. Well an issuance drop from 4.5% is the equivalent of 3 halvenings happening at ONE time. (4.5 cut in half to 2.25 again to 1.125and again to .56). 

As Ethereum is already at a multi year low supply on exchanges, once this happens Ethereum will become scarce with every transaction. 

To add to that since BASE Fee-which will be burned and removed from the circulation-is proportional to network usage the ETH scarcity will escalate everytime when ETH network experiences high traffic 

This phenomenon is referred by crypto community as Cliffening 

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