EIP-1559 and You: Gas refunds and a new way to ape into token launches?

UPDATES

  • Ethereum’s London hard fork has been executed at block number 12965000.

Up next in Ethereum’s ‘tour’ of major European capitals is quite an important destination: London. The ‘London’ hard fork, set to drop Thursday 5 August, at around 1.15 pm UK time, will bring about one of the biggest changes to the Ethereum Network to date: an update in its gas price auction mechanism, colloquially referred to as the ‘Burn Fee Upgrade’.

In one sentence, EIP-1559 changes how the gas price you set to pay for transactions (tx) is processed by miners, by splitting up the total gas cost of the tx into two parts — a ‘base fee’ which is burnt upon tx execution, and a ‘miner tip’ which incentivizes a miner to pick up your tx first.

The goal of EIP-1559 is to reduce the wild swings in gas prices and make network ‘congestion’ a more gradual and predictable process. The algorithmically-established ‘base fee’ is the minimum gas price you must pay for your tx to even be considered for inclusion in the next block, and is a function of how congested the network is (block size): the more crazy token launches in a day, the more congested the network, the more the base fee increases.

Technically speaking, EIP-1559 aims to swap volatility in gas prices for volatility in block size — the more the network is congested, the bigger the blocks that can be mined become, with a minimum close to 0 gas, a target block size (average) of 15 million gas, and an upper limit of 30 million.

Why do I care about the block gas limit? As of the Berlin fork, each block on mainnet is ‘worth’ 15 million gas in computational cost, which is fixed over time (you can check it out here: https://etherscan.io/blocks). It is generally speaking ‘unsafe’ for a block that is too computationally intensive (too big in terms of gas limit) to be processed and propagated safely by all network nodes — smaller nodes may struggle. Block gas limit has, up until now, not had an explicit impact on user experience in terms of fees, but EIP-1559 changes this.

You’ve been here: I send my tx on metamask as ‘fast’ for 40 gwei, to see 3 minutes later that ‘fast’ processing times on gasnow.org are at 120 because of some meme coin launch I had no idea about, or the price of ETH is tanking, both quite frustrating scenarios: this is ‘volatility in gas prices. By switching it up for ‘volatility in block size’ what happens is that if the network ‘sees’ that there is congestion, the current base fee (which is set at whatever the congestion is now) can increase up to a maximum of 12.5% per block, every new block.

What this means is it would take roughly 20 blocks (5 minutes) for gas prices to 10x and 40 blocks to 100x. Compared to the scenario where they can 2x or 5x from literally one moment to the next, and stay that way for hours, this mechanism seems more favorable. For example, if the current base fee is 50 gwei, and some crazy NFT launch goes live, the base fee can increase the very next block is 56.25 gwei (+12.5%).

Source: Finematics — Can ETH Become Deflationary? EIP-1559 Explained

If the NFT launch in the example is really all the hype, then base fees (and block sizes) will continue to increase until it’s sold out, and then both return to levels the average user is actually ok with paying for.

Okay, now what’s a miner tip? The way you’ve been paying gas for txs is based on a first-price auction: if you’re a high-frequency DeFi trader, a frontrunning bot, or just someone who really has to buy some new token a second into launch, you’ll submit your tx with a crazy high gas price, guaranteeing miners put you in the VIP section of the next block. With EIP-1559, this mechanism remains the same but is only applied to the miner tip. It is not required for any user to pay a single gwei of Ether more than the base fee for their tx to be processed, but if you really need your tx to be executed with a turbocharger, go ahead and submit a crazy high miner tip. As you can tell, EIP-1559 is not explicitly designed to stop bots, frontrunning arbitrage, and MEV (extra profit miners can make by playing around with tx ordering — check it out here: https://explore.flashbots.net/).

Gas refunds. Tell me. With EIP-1559 any tx you send should be ‘formatted’ for the new system, by specifying a maximum fee limit (maximum you’re willing to pay) and an inclusion fee (miner tip). Let’s clarify with an example.

Say a user submits a tx with a fee limit of 250 gwei and 5 gwei in inclusion fee. If the base fee is set at 100 gwei, you get a 145 gwei refund! If the math checks out, 250 submitted — 100 burnt in base fee — 5 sent as miner tip = 145 gwei unused and refundable.

A word of warning is that txs have to be formatted according to this specification for this to work, sending 250 gwei as a ‘legacy tx’ isn’t going to net you any refund even if the base fee is set at 100 (The remaining 150 is considered miner tip). Unless you submit your own txs from ethereum nodes or programmatically via web3 and the likes, it will be up to the developers of the dApps you use and the wallet providers you use to make sure you can input send txs formatted correctly for EIP-1559.

At the end of the day, EIP-1559 should be able to mitigate the average rage episode of submitting a tx and waiting for hours after being caught off guard by a sudden gas price increase, turning gas price evolution into a more predictable process, but does not fundamentally change how to be first at buying the next big token — a large miner tip will still place you close to first place in the next block.

This piece was focused on what EIP-1559 means for the end-user, there is a lot more to cover: dApp gas price estimation and debugging, implications of base fee burn on token deflationary and bitcoin-like limited-supply narratives, risks of chain splits and other risky miner activities, amongst others.

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References

J. (2020, June 11). Can ETH Become Deflationary? EIP-1559 Explained — Finematics. Finematics. https://finematics.com/ethereum-eip-1559-explained/ Kim, C. (2021, June 9).

The Investment Implications of Ethereum Improvement Proposal 1559. Https://Www.Coindesk.Com. https://static.coindesk.com/wp-content/uploads/2021/06/EIP-1559-Ethereum-Fee-Market-Upgrade-Explained-1.pdf

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