First proposed by Vitalik Buterin in 2018, Ethereum Improvement Proposal 1559 (EIP-1559) represented an overhaul of the fee market in Ethereum. The biggest change was the introduction of fee ‘burning,’ which had the effect of reducing Ethereum’s inflation rate. From the perspective of a fee-paying user, EIP-1559 does not have a significant impact. In other words, the cost per transaction for users is basically unchanged. EIP-1559 was included in the ‘London’ hard fork which was completed on August 5, 2021.
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How Fees Work in Ethereum
Space on each block in the Ethereum blockchain is limited to 12.5 million units of gas per block, and new blocks are mined approximately every 15 seconds. Since miners optimize for profitability, to incentivize miners to include your transaction in the next block, you must add an amount of ETH to your transaction. This constitutes the fee.
The Changes Made by EIP-1559
Prior to the implementation of EIP-1559, Ethereum’s fee market worked on the ‘first price auction’ model. So, if you wanted your transaction to be picked up by miners sooner, you just attached a higher fee.
EIP-1559 replaced the first price auction model with a system that includes two types of fees: a base fee and an inclusion fee. The base fee is a per-block fee that all transactions must include, but it adjusts dynamically based on network congestion. When the network is busier, the base fee is higher. When the network is less congested, the base fee adjusts downward.
Importantly, rather than being claimed by miners, in the new system the base fee is burned (destroyed). Assuming continued high demand for block space (ie. many people wanting to make transactions), this should have the effect of reducing Ethereum’s inflation rate.
EIP-1559 Stats
Since its implementation in August of 2021, EIP-1559 has had a material impact on the inflation rate of Ethereum. As of Feb 2024, EIP-1559 had resulted in the burning of approximately 4 million ETH. Given that over the same period about 7 million ETH were issued, Ethereum’s overall supply growth (ie. inflation rate) was approximately 1% per year (based on a total supply of ~120 million ETH). Without EIP-1559, that rate would have been over 3% per year. By comparison, over the same period, Bitcoin’s inflation rate was approximately 1.7% per year. Bitcoin’s inflation rate will be reduced to ~0.875% upon the next Bitcoin halving in April 2024.
You can track the rate of EIP-1559 fee burning and other Ethereum supply statistics at ultrasound.money.
