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Aug 3, 2021

Ethereum Improvement Proposals

Ethereum Improvement Proposal (EIP) refers to any document with suggestions for improving the protocol, network and contract standards on the Ethereum blockchain. Any community member can propose new features and processes.

What Is an Ethereum Improvement Proposal (EIP)?

Ethereum Improvement Proposals (EIPs) are documents with proposed features and processes that proffer potential changes for the Ethereum blockchain. Any member of the Ethereum community can submit them to the Ethereum platform.

Usually, developers or groups of developers will submit an EIP based on changes they believe will improve the Ethereum protocol and network. The proposals are assessed and debated by Ethereum’s core developers, who manage its repository on the GitHub platform. EIPs pass through various stages of assessment. If ultimately accepted, they are usually bundled together to form upgrades referred to as “forks.”

Types of EIP

There are several categories of Ethereum Improvement Proposals:

  • Standard Track EIPs relate to changes that will affect most or all Ethereum implementations. These include improvements to the network protocol and changes in transaction regulations.
  • Networking EIPs are proposals for changes to network protocol specifications. 
  • Meta EIPs relate to requests and operations applied to areas other than the network protocol.
  • Interface EIPs propose improvements for user standards and specifications. 
  • Ethereum Request for Comments (ERC) EIPs relates to standards and conventions around applications. 
  • Informational EIPs are related to guidelines for the actual design of Ethereum.
  • Core EIPs are proposals that require a “consensus fork.”

All Ethereum Improvement Proposals must also move through several stages before being adopted:

  • Draft: An EIP under consideration.
  • Last Call: An EIP has moved through the initial stages and is awaiting review.
  • Final (Non-core): An EIP that has been at Last Call for at least two weeks and has had all technical concerns addressed.
  • Final (Core): An EIP will not be adopted imminently but is considered for later adoption.

The Current Proposals

There are several EIPs currently in progress. Some, such as EIP-2718 and EIP-2930, aim to introduce new forms of transactions. Others focus on making transactions and smart contracts more secure. The most prominent current EIP-1559 is intended to fundamentally change the fee structure of Ethereum transactions to reduce transaction costs and increase efficiency.

Rising Transaction Fees

Ethereum has a highly efficient transaction speed, averaging around 10 to 15 per second. This puts it significantly ahead of other major cryptocurrencies such as Bitcoin, which averages 3 to 5 per second. This efficiency is part of what has made Ethereum the most used blockchain in the world. However, in recent years, this success has rapidly increased network congestion, which has caused transaction costs to increase significantly. The average transaction fee is currently $40. 

While Ethereum is still growing rapidly, some users have migrated to other blockchain systems due to increasing fees. While transaction fees help operate the network and discourage bad actors, many Ethereum users are concerned that these fees are rising too quickly.

As a result, some smaller operations have moved to other blockchains. Rivals to Ethereum, such as Solana, NEAR, and Cardano, are emerging and offering significantly lower transaction costs. The EIP-1559 aims to address the issue of rising transaction fees.

Upcoming EIP-1559 Protocol

The EIP-1559 core protocol specifications include the proposal to change the nature of Ethereum blockchain transactions fundamentally. Ethereum co-founder Vitalik Buterin initially put forward the proposal in 2019. In recent months, it has come to prominence and is due to be one of the proposals bundled together in the July 2021 London hard fork upgrades. 

EIP-1559 would introduce a new, two-tier system for Ethereum transactions. Currently, transactions involve a “gas fee” paid by users to Ethereum miners to include their transactions in a block. Users must estimate the gas fee based on network usage at the time of the transaction. In effect, fees are decided in a standard auction system. As there is no current limit on transaction fees, the cost can be extremely high. In theory, EIP-1559 could save users up to 90% on transaction fees. 

Transaction fees and processing times are currently quite unpredictable for users. As Ethereum use has consistently increased, network congestion and gas costs have increased along with it. This can cause problems for newer users of the Ethereum network and smaller operations. It also means that some users end up paying more than others to have their transactions included in the same block, which some argue makes the current auction system fundamentally unfair.

Two-Tier System

EIP-1559’s two-tier system would remove some of the unpredictability and guesswork from Ethereum transactions. It would introduce an algorithmically determined BASEFEE for each transaction. The BASEFEE would change depending on the volume of network traffic at the time of a transaction. Users could set a fee cap if the BASEFEE changes between the initiation of the transaction and its inclusion in a block.

EIP-1559 will aim to keep network utilization at around 50%. When utilization exceeds this figure, the BASEFEE will increase; when utilization drops below 50%, the BASEFEE will decrease. Transactions in the same block will all cost users the same amount. 

The system would also make Ethereum transactions more efficient by incentivizing miners to reduce transaction delays. The Ethereum Improvement Proposal aims to introduce flexible blocks, which can adjust dynamically to demand at any given time. Currently, transactions generally use fixed block sizes. The change should significantly improve Ethereum’s user experience and allow for faster transactions.

Optional Tips

Users would also have the option of including tips to incentivize miners to expedite their transactions. Users would decide the amount they’re willing to pay — on top of the BASEFEE — to speed up their transactions. Miners would keep all of the tips, but would no longer receive the gas fee. This has made EIP 1559 perhaps the most controversial EIP in Ethereum’s history.

Scarcity Mechanism

As mentioned above, the BASEFEE proposed as part of EIP 1559 would be “burned” upon use. This would consistently reduce the amount of Ether (ETH) in circulation. This has led many to interpret EIP 1559 as Ethereum’s “scarcity engine.” As less of the cryptocurrency would be in circulation, its value would increase along with its scarcity. This would make EIP 1559 a deflationary measure, potentially increasing Ethereum’s market power.

Other major cryptocurrencies employ their own scarcity mechanisms. Bitcoin, for example, utilizes “halving events” roughly every four years. The reward for mining Bitcoin is split in half, which in turn halves its rate of inflation. EIP 1559 would work more gradually for Ethereum but could ultimately have a similar impact.

Miner Response

Ethereum miners are largely unimpressed by EIP-1559. This is not particularly surprising, considering that gas fees make up around half of their overall fees. Instead of going to miners, base fees would be taken out of circulation. While miners would still keep their tips, these won’t amount to anything like the sums made through gas fees. If EIP-1559 successfully makes transactions more efficient overall, this may also disincentivize some users from including tips for non-urgent transactions.

Major Ethereum mining pools such as Flexpool and Bitly are strongly opposed to EIP 1559. Flexpool has even run a marketing campaign opposing the proposed changes. Overall, it’s estimated that mining pools opposed to EIP-1559 account for half of Ethereum’s total hash rate, a term that refers to the total computational power being used to mine and process transactions within a blockchain system. Bitly alone accounts for around 20% of Ethereum’s hash rate. This means that the progress of EIP-1559 could be a significant fork in the road ahead for Ethereum development as a whole.