EIP1559 is proposal to make several tightly coupled additions to Ethereum’s transaction fee mechanism, including variable-size blocks and a burned base fee that rises and falls with demand. The proposal has attained considerable interest given its potential to reduce ETH’s free float supply in the long run, improve UI in times of fee congestion, and disincentive miners from accepting payments in any assets other than ETH. The paper assesses the game-theoretic strengths and weaknesses of the proposal and explores some alternative designs.
Citation
Roughgarden, T. (2020). Transaction Fee Mechanism Design for the Ethereum Blockchain: An Economic Analysis of EIP-1559.
Can EIP-1559 meaningfully affect the existing game-theoretic impediments in Ethereum to various forms of network attacks (e.g. double-spend attacks, censorship attacks, denial-of-service attacks)?
Background
Bitcoin pioneered the use of first-price auctions to determine which transactions miners are incentivized to prioritize in their block templates. In such a model, users bid up fees on the basis of demand for quick transaction settlement.
First-price auctions are challenging for users to reason about because a user’s optimal gas price depends on the gas prices offered by other users at the same time.
In times of high fee volatility, first-price auctions have led to inefficiencies as users that demand quick settlement, such as those engaging in arbitrage, tend to overpay to have their transactions included in the next block.
Wallets and smart contract applications are also impacted by fee volatility since it becomes impossible to determine appropriate fee thresholds.
EIP-1559 intends to address this issue by introducing a posted-price auction that regulates fee prices and smoothens the impact of demand spikes on transaction fees.
This mechanism enables the network to better adjust for congestion via dynamic block sizes (doubling the current block gas limit), as well as two new fee parameters; the base fee and the tip.
The base fee is a protocol-computed reserve price (per unit of gas). Paying the base fee is a prerequisite for inclusion in a block. Much like a difficulty adjustment algorithm, the base fee is adjusted to reflect network demand on the basis of block utilization. The protocol actively targets an average block size of 12.5M gas. If the previous block used less than 12.5M gas, the base fee goes down. If the previous block used more than 12.5M gas, the base fee goes up (following an exponential function).
Since miners could cartelize, spoof transactions, or collude with users off-chain to maintain fees artificially high, the base fees paid in every block are destroyed, or burned. This is one of the biggest points of contention of EIP-1559, given the potential impact such a policy would have on miner income. In spite of the negative impact on miner revenue, EIP-1559 carries strong community support because this design would lead Ethereum’s inflation rate to decrease.
In order to incentivize miners beyond the block subsidy, EIP-1559 also introduces a tip parameter that, in times of high demand for transaction settlement, can revert fee price discovery back to a first-price auction. Unlike the base fee, miners receive tips as part of their revenue.
Summary
No transaction fee mechanism, EIP-1559 or otherwise, is likely to substantially decrease average transaction fees; persistently high transaction fees is a scalability problem, not a mechanism design problem.
EIP-1559 should decrease the variance in transaction fees and the delays experienced by some users through the flexibility of variable-size blocks.
EIP-1559 should improve the user experience through easy fee estimation, in the form of an “obvious optimal bid,” outside of periods of rapidly increasing demand.
EIP-1559 should decrease the risk of economic abstraction, whereby miners accept payments with assets other than ETH. As such, the proposal makes ETH the de facto instrument to pay for transaction fees at the block level.
The game-theoretic impediments to double-spend attacks, censorship attacks, denial-of-service attacks, and long-term revenue-maximizing strategies such as base fee manipulation appear as strong under EIP-1559 as with first-price auctions.
EIP-1559 should at least modestly decrease the rate of ETH inflation in the long run through the burning of transaction fees.
The seemingly orthogonal goals of easy fee estimation and fee burning are inextricably linked through the threat of off-chain agreements.
Alternative designs include paying base fee revenues forward to miners of future blocks rather than burning them; and replacing variable user-specified tips by a fixed hard-coded tip.
EIP-1559’s base fee update rule is somewhat arbitrary and should be adjusted over time.
Variable-size blocks enable a new (but expensive) attack vector: overwhelm the network with a sequence of maximum-size blocks.
Method
The author begins by providing a formal game-theoretic framing of Ethereum’s current fee price discovery mechanism, which follows a first-price auction model.
The current first-price auction mechanism is then compared to EIP-1559, and the author lays out the key concepts that underpin the proposal.
Then, the author formalizes the concepts of a “good user experience” and “easy fee estimation” under EIP-1559’s posted-price mechanism.
The desirable game-theoretic guarantees of EIP-1559 are then evaluated, and the extent to which the current proposal satisfies such guarantees is examined.
Lastly, the author investigates the possibility of collusion by miners over long time scales and describes worthy directions for further design experimentation.
Results
The biggest potential benefits of the proposed changes with EIP-1559 are as advertised: easy fee estimation, in the form of an “obvious optimal bid” outside of periods of rapidly increasing demand; lower variance in transaction fees due to increased flexibility in block size; game-theoretic robustness to protocol deviations and off-chain agreements, both at the scale of a single block; and reduced inflation due to fee burning.
Most of the major risks in implementing EIP-1559 are the same as those for any major change to Ethereum’s L1: implementation errors; a fork caused by some parties rejecting the changes; extra complexity at the consensus layer; additional parameters to be tweaked with every network upgrade; and the spectre of unforeseeable downstream consequences.
Additional risks specific to EIP-1559 include the possibility of a hostile reception by miners (due to lost revenue from burned transaction fees) and a new (albeit expensive) attack vector enabled by variable-size blocks.
Implications & Follow-Ups
Cryptoeconomic monetary policy is a widely debated topic, as it is often portrayed as one of the unique value propositions of crypto assets.
Mechanism design, in this context, is intended to optimize a network’s security budget while minimizing risk.
Given the infancy of this research field, the intrinsic relationship between transactional capacity, monetary inflation and network security has been poorly understood from a game-theoretic perspective.
“An Economic Analysis of EIP1559” is one of the first attempts at fully mapping all economic actors at play and the factors that drive their decisions. Its thoroughness will likely inspire similar analysis of other protocols.
A considerable implication of this work is that it shows that it is possible to link on-chain activity with network value through market-impacting operations such as token “burns”, as their impact is similar to a stock buyback, or a fiat currency being taken out of circulation.
Such market-impacting operations may prove possible the implementation of a unified mechanism that provides deflationary pressure in the long-run (via token burns) while still maintaining a block-by-block subsidy.
Discussion Topics
Do the benefits of EIP-1559 justify the risks of adopting it in light of potential miner/staker collusion?
Should ETH1 adopt EIP-1559 ahead of ETH 2.0?
Will tips be sufficient to finance network security (by incentivizing miner competition) in a sustainable fashion?
Can off-chain agreements such as out-of-band payments undermine EIP-1559’s posted-price auction?
An interesting paper was recently shared on Research Pulse that showcases the predominance of out-of-band payments. Since transaction ordering within an Ethereum block can greatly impact the profitability of arbitrageurs, there has been anecdotal evidence of traders paying miners directly via out-of-band payments (outside of block rewards) to have their transactions included first.
The paper validates the notion that out-of-band payments do occur. It found that the 21 most prominent mining pools on Ethereum, which combined control over 50% of the hashrate, do include transactions in their blocks that were never sent to the mempool. A caveat is that the data also seems to include payouts from mining pools to individual miners.
Even in light of miner payouts, this implies that there is an already-existing direct relationship between 3rd parites and Ethereum miners. In the context of EIP1559, this relationship may strengthen since miner payouts would be affected by fee burning. As a response, miners could further collude with such 3rd parties to require out-of-band payments in addition to a base fee. Tips would only affect transaction inclusion if they are higher than such out-of-band payments.
This is perhaps a reason to evaluate the implementation of EIP1559 exclusively on ETH2, as opposed to ETH1.
Is there any modeling you’re aware of that estimates the changes to miner revenue?
This is perhaps a reason to evaluate the implementation of EIP1559 exclusively on ETH2, as opposed to ETH1.
I’m a little fuzzy on where EIP1559 fits into ETH2, but I think that’s because I’m a little fuzzy on how ETH2 transactions work in general. What resources do you recommend for me to check out to clarify that picture?
To my knowledge, no formal work has been done on the economics of EIP1559 under eth2. Structurally, the overall schema would likely be identical. However, PoS would certainly change the weight of some of the parameters.
If eth2 features 1024 shards, overall gas consumption would increase considerably. At the same time, increased throughput would likely make network fees much lower. Combined, those two factors could potentially balance things out and ultimately lead to a proportionate amount of gas being burned. In theory, PoS could also solve the aforementioned issue of off-chain agreements, but only if validator cartelization does not occur.
The presented proposal of EIP 1559 is definitely a major step towards making transaction fees more predictable, reducing delays in transaction confirmation, and improving user experience by automating the bidding system. Mr Roughgarden provides knowledgeable insight into the economic implications of the proposal. He also puts across the idea of paying the base fees forward to reach a consensus with the miners. I believe that this would not be essential, and here are my reasons for the claim (drawing ideas from Husu and Konstantopoulos’s analysis):
*What happens if miners do not stick to EIP 1559?
Miners can launch an altcoin on Ethereum’s state: Not likely.
The state of Ethereum is very complex: there are a high number of tokens, smart contracts, and DeFi applications. These tokens would have no value on the fork chain.
AMM pools, oracles etc. would be messy on the fork chain.
In conclusion, it is almost impossible to fork Ethereum’s state.
Miners can use a new state to launch an altcoin: Not likely.
This seems interesting at first glance, given the success of the Binance Smart Chain (BSC).
But we need to consider the importance of existing users in such a scenario.
There are two approaches that miners can take here:
Bootstrap Eth’s new supply from 0:
This would reduce the asset’s demand since to make this plan work, one would need high inflation for an extended period of time.
In the case of BSC, Binance is the sole block producer, thereby eliminating the need for any mining incentive.
Copy Eth’s distribution:
The new users could take advantage of this and keep bringing down the price for a long time, reducing the value of the block reward of miners.
Manipulating the base fees to zero: Not likely.
Miners can join Ethereum users and keep the base fees lower than the gas limit, thereby decreasing the base fees to encourage demand.
Miners can implement a Miner Activated Soft Fork to deem more than half full blocks invalid, eliminating any incentive for all miners to mine full blocks.
This would require extreme coordination and trust between traditionally distrustful parties
This would be a massive attack on the network itself - pushing away users, messing up with the consensus level, and as a result, drastically cutting down revenue for the miners. This would be similar to self-destruction for miners and is extremely unlikely to be executed.
*Does this mean that miners will stick to EIP 1559?
All the above-discussed alternatives do not make much sense for miners, given the reasons discussed in this comment.
Even with the implementation of EIP 1559, miners would continue to earn from the block subsidy and MEVs. Miners would always have the incentive to earn high amounts of revenue in the long term, especially given the additional component of tips in this proposal.
In conclusion, it seems that it is in the best interest for miners to implement EIP 1559 smoothly.
Is there means that when larger amont of transactions occurred in previous block and then next block increasing the average block size fee? Even the next block only helf of the previous transactions.
And the overpay can solve by auction mechanism?
I also thinks that larger transactions block would cause congestion in the block may delay the next block.
Is there means that when larger amont of transactions occurred in previous block and then next block increasing the average block size fee? Even the next block only helf of the previous transactions.
Great question, the protocol only targets transaction size in units of gas, not gas price. So large transaction amounts do not impact the base protocol. For actual simulations on this, there’s a python notebook that provides a complete set of scenarios:
And the overpay can solve by auction mechanism?
This is to be determined, but the hope of the proponents of EIP1559 is that the proposal solves overpaying gas by orders of magnitude!
I revisited this thread now that we are on the verge of EIP 1559 implementation.
I particularly like this comment by @Ishgun_Singh because it is making some predictions that can be assessed following the implementation of EIP 1559. Perhaps it would be valuable to try to extract some additional research-backed predictions from the paper and thread?
As a miner, EIP1559 was very upsetting. The idea of ‘burning’ a percentage of transaction fees seemed out-of-line. From my perspective, miners have successfully secured Ethereum’s blockchain for 7 years, however, the distribution of Ether during Ethereum’s Genesis block (mostly crowd-sale) is still greater than 50% of the distributed Ether.
Also, with ETH2 lingering in the distance to be implemented, will begin rewarding the people/businesses who have the most Ether with more Ether. If anything, the developers should have boosted the mining rewards up until the ETH2 launch.
EIP1559 is not going to necessarily make transaction fees more predictable, its simply going to make it to where “x” gas price will NOT be put into a block. 1559 should greatly help with reducing MEV rewards. Since the upgrade, when looking at block explorers, it seems as though mining pools are still only utilizing a few percent of the maximum block size every few blocks, with the rest of the blocks being nearly 100% full (or double capacity when compared to before the London upgrade.
In conclusion, the Ethereum developers really worked extremely hard on implementing this “upgrade”. Dapp end-users will unfortunately not benefit from the upgrade, short-term, but maybe the mining pools can tweak their software a bit to make this upgrade work as the Ethereum developer’s imagined.
It should be interesting to see whether 1559 contributes to a decrease in the hashrate due to the points you have raised. Thus far, there was just a slight drop:
Since the upgrade, when looking at block explorers, it seems as though mining pools are still only utilizing a few percent of the maximum block size every few blocks, with the rest of the blocks being nearly 100% full (or double capacity when compared to before the London upgrade.
As mentioned in the summary, the protocol targets a block gas limit that is now 15M gas units/blocks. The hope of this design is to, on average and on a long time scale, replicate full blocks prior to 1559 so that the network can process the same number of transactions as before. I guess now that the target has been raised to 15M (as opposed to 12.5M) so it would be a slightly higher capacity.
This is the design goal. It’s possible that user/miner behavior makes it so that blocks are empty more often than anticipated, as you pointed out. One way to measure this is via the count of transactions processed per second on a daily basis:
Thus far, there has been a slight drop in TPS, but not yet noticeable. It should be an interesting metric to track as 1559 progresses.
One final point – the requirement of a base_fee certainly lowers MEV revenue, but likely by very little due to the wide profit margins enjoyed by attackers. According to this paper, sandwich attacks alone granted attackers close to 190M USD between May 2020 and April 2021.
I mine Eth, and my profitability has not dropped significantly in the first day. On the other hand, having done a few test transactions fees have been dramatically reduced on wallet-to-wallet transactions. I am wondering if the network activity will go through a hiccup where users are adjusting to the new gas fees and adjusting their behaviors accordingly. Although MEV for malicious attackers may be slightly reduced at the outset, as Cipherix points out 1559 may not have a significant impact on sandwich attacks specifically.
On a separate note, it’s uncertain the extent to which these new parameters will change user behavior. It can be a fascinating area of research in behavioral economics. Prior to 1559, users might have felt bad for paying high transaction fees whereas post-1559, that feeling might change as base fees are burned.
I had discussed this very issue of UX/UI misunderstanding causing excessive gas fees and I went back and forth on whether it would make a user feel better knowing that no one received the accidental overpayment:
I do believe you’re right that it might affect sentiment for the simple reason that we KNOW it’s not collusion or conspiracy causing the overpayment because no one is receiving it directly.
It may indirectly cause a short-term increase in the price due to accidental burns, but that might also not make a user feel “as bad” as if there was a scenario in which there simple mistake led to someone else gaining a profit. Both are equal losses in “value”, but there “may” be a difference in principle that may encourage users to keep participating whereas the other scenario may have discouraged further participation.
This whole discussion is why I brought up “user behavior” in the previous comment.
On another note, my mining profitability today is still NOT really down at all. If anything it’s more stable and a little bit higher than usual.
I worry sometimes, about the block size (in data) increasing too fast. Recently (after London), I looked into the current block sizes and seemed to be around 100kb. So, every 130 seconds or so, the blockchain adds 1Mb worth of data.
If there are 1024 shards, then hopefully not all shards are / will be fully utilized. Making Ethereum that scalable and lets say that the demand is where it is currently, then gas fees should almost be 0.
Extremely low gas fees would ultimately increase transaction and bandwidth demand (for many reasons, including to compound returns on yield farming). The drawback I see, is that if the bandwidth is there, and affordable, it will be used.
This bandwidth ultimately turns into data needed to be stored on the blockchain. Assuming shards are equal to current blocks in terms of gas limits, while taking in effect that Ethereum developers are able to reduce block sizes by another 50%, this would mean that every block would add ~50Mb to the blockchain?
I used Ethermine briefly, but ended up switching to Nicehash and selling my hashpower to mine eth and get paid for it in btc. I was doing this because of the fees associated with moving eth on the network, but now that may not be as much of an issue and may be worth switching back to determine.
I’m not a maxi of any kind, so I don’t end up holding the btc either. Trading is a completely different beast, and I tend not to let my mining color how I treat my portfolio and vice versa.
Now with Ethermine, you can choose to get paid out on the Polygon (MATIC) network. If you don’t choose to get paid on the Polygon Network, then miners have to pay the transaction fee. Just FYI.
Recently the most popular topic on the blockchain is the London update of Ethereum.
The London upgrade of Ethereum was completed on August 4 and included the famous EIP-1559. Since the launch of EIP-1559, August 8, 16,230.38 ETH has been burned, worth nearly 50 million U.S. dollars. When the real ETH was burned, people finally felt the burning energy of EIP-1559 and saw that a large amount of ETH was burned every day.
Of course, only EIP-1559 cannot lead to deflation of ETH. The current daily increase of ETH is about 13,000, and the amount of ETH burned by Ethereum on the first day after EIP-1559 is launched is 4791.5. EIP-1559 reduces the rate of new ETH by about 30% (of course, the amount of ETH burned will also change according to the usage of the network, here is just a rough estimate based on the current situation)
The concept of the halving effect comes from Bitcoin’s halving every four years and each halving results in a sharp drop in its new issuance. When the amount of new additions drops while the amount of demand remains the same or rises, it will push up the price. This has been proven many times in the history of Bitcoin.
{The impact of EIP 1559 on miners}
After the upgrade of EIP 1559 in Ethereum on August 4, most of the transaction fees granted to miners in the past will be burned and removed from circulation. A week later, about 31646 ETH were burned, accounting for 33% of the increase in the supply of new tokens. However, the decrease in transaction fee income does not seem to have a significant impact on the income of Ethereum miners. According to Coin Metrics data, after the activation of EIP 1559, the average daily miner income in US dollars increased by 7.1% and remained at the highest price over two months. I think the following two reasons might result in the above mention phenomenon.
The price of ETH has risen. According to Anand Gomes, the co-founder of Paradigm, the London upgrade of Ethereum has pushed up the price of ETH and has also attracted some new investors. Although the original ETH income obtained by miners from the transaction has decreased, this part of the “loss” has been made up because of the increase in the price of ETH.
Miners can still get rewards in the block through “MEV”. Since the upgrade, Ethereum users have paid a 7,141 ETH “MEV”, hoping that their transactions will be processed by the miners earlier.
What’s more, the rise in the price of Ethereum and the surge in non-fungible token (NFT) trading activities have also made up for the loss of potential miners’ income caused by EIP-1559.
