Introduction
EIP-1559 is planned to be released in July. It has a considerable user-facing impact when it comes to paying transaction fees and on the total supply of ETH.
In this article I wanted to focus on the main impact users will see and a basic overview on how EIP-1559 works to begin with.
Main Impact
There are two big points of impact that EIP-1559 will have.
First, the gas price will be more predictable and more stable with less volatility than we see now. The user experience in paying transaction fees should improve, although this doesn't mean that transaction fees will decrease.
Second, there is a potential for the total ETH supply to decrease.
If the above two lines are all you read about EIP-1559, then great, you understand the impact it will have. However, for more information, I'll cover how EIP-1559 accomplishes these two things below.
How the Current Fee Model Works
The current fee model works in an auction style, where users who are willing to pay a higher gas price for their transaction, get to move ahead in line.
Users who do not bid enough for their transaction may have to wait a very long time for their transaction to go through.
Furthermore, fees can spike and be unpredictable as external events (like a new coin being released or liquidations) may bring sudden demand changes.
The "correct" price to pay for gas is never known ahead of time, and users have to use gas price estimators.
How EIP-1559 Works
The new model introduces some controls around gas price. Specifically, there is a new concept of a "base fee" which makes up part of a transaction fee that a user pays. The base fee is automatically set by the ethereum protocol depending on demand.
The base fee is designed to be the market rate for gas price. If the network is less than 50% utilized (determined by how much of each block is used), the base fee goes down until the 50% network utilization is reached. The idea is that lowering the base fee will bring more people into the network until a balance is reached at 50% utilization, determining the market rate for gas.
The opposite is true when the network is more than 50% full. The base fee is gradually increased until the network utilization comes down to 50%.
This improves user experience when paying for transactions as the market rate for gas is known in advance, and gas price changes more gradually over time.
Users can still jump to the front of the line during periods of high demand by paying a "miner tip", essentially similar to the current model. But this would not always necessarily be needed.
Furthermore, the base fee is burned in each block. This creates a situation where the amount of ETH being created in each block (the block reward), may be less than the amount of ETH being burned in each block (base fee). At the current market demand this appears to be the case where ETH supply would go down. This would reward token holders and increase the price of a single ETH token.
Conclusion
EIP-1559 provides users with better user experience and a potential for a decreasing token supply. It may not necessarily bring fees down, but overall it has great benefits for ETH users and holders.