EIP1559 is an inflation killer, not a fee reduction mechanism
Bitcoin and Ethereum’s diverging monetary policies
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A key difference between Bitcoin and Ethereum lies in the total supply of coins. Bitcoin has a capped supply of 21 millions coins (of which almost 19 are already in circulation), issued at a current rate of 6.25 bitcoins per block since the 2020 “halving” (halving: every four years, the issuance rate is divided by two). This translates into a slightly less than 2% monetary inflation rate (new supply per year / total in circulation).
Meanwhile, there is no hard cap for Ethereum’s supply. Instead, Ethereum follows a “minimum necessary issuance” model, which means that the ecosystem comes to a consensus (using off-chain discussions) regarding how much new eth needs to be issued to guarantee network security. Ethereum still being a Proof-of-Work blockchain at this time, block rewards are necessary to incentivize miners to secure the network. Originally fixed at 5 eth per block (after the initial eth auction of 2014), the issuance rate was cut to 3 eth per block in 2017, and then to the current 2 eth per block in 2019. This brings Ethereum’s monetary inflation rate to about 4%, twice that of Bitcoin.
EIP1559: a reform of the transaction fee market
In July 2021, Ethereum is scheduled to adopt the London hard fork, including the update EIP1559. So what is it, and why is that important?
EIP1559 will reform completely the fee market for transactions in Ethereum. Instead of guessing how much to pay for transaction fees (the gas price), which usually leads to overpaying, users will be able to see the minimum gas price necessary to be included in the current block, which will be called the base fee. If they wish to bid further than that — for example because they’re sending a high value transaction-, they can do so by using what’s called tips. Tips will still be collected by miners, but the base fee will be burnt, meaning it will be taken out of the global supply of eth.
The upgrade will not increase network capacity overall, and hence will not decrease transaction fees, but it will make them more predictable, and hopefully smooth out sudden spikes in fees thanks to an automatic adjustment of the base fee and flexible block sizes.
