Unpacking EIP-1559
EIP-1559 is slated to go live in July 2021. Its implementation will mark the largest change to a Layer 1 fee market mechanism to date. It aims to better regulate the consumption of block space, create more predictable fees for users, and make economic activity on Ethereum more value accretive to ETH holders via a fee burn mechanism. Variants of EIP-1559 have already been deployed on Filecoin, Near, and Celo with moderate success.
The Problem With The Current Fee Market
At the moment, miners are (arguably) overpaid. They receive compensation from new ETH issuance, transaction fees and, in some instances, MEV. New issuance comes at the expense of existing ETH holders, since they are the ones being diluted, while transaction fees and MEV are costs borne by users of Ethereum. With the inevitable transition to PoS looming on the horizon, mining as a whole is already being deprecated.
The current design of Ethereum’s fee market uses a first price auction, meaning that miners fill up blocks with transactions based on the size of their fees. The bigger the fee, the more likely a transaction is included in the next block, the more fee revenue a miner earns. These auctions make gas costs on Ethereum difficult to compute accurately, hurting the user experience. Whether due to poor guessing or tools that provide inaccurate estimates, users can be prone to overpaying miners.
A key intent behind EIP-1559 is smoothing out
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