What is EIP-1559? Key Ethereum Improvement Proposal aims to unleash network potential
The upgrade has been described as "controversial", but also beneficial
On 5 August 2021, the second-largest blockchain network in the world, Ethereum (ETH), will be experiencing its much-anticipated" London Hard Fork" network upgrade.
This upgrade has been dubbed the Ethereum Improvement Proposal Process, or EIP-1559.
EIP-1559 “will unleash greater potential”
Sam Onigbanjo, a UK-based Nigerian capital markets trader and cryptocurrency expert who has appeared on CNBC and Virgin Entrepreneur, told Currency.com exclusively that the improvement “will definitely unleash greater potential for the ETH network”.
One change EIP-1559 will bring about, which Onigbanjo deems advantageous to ETH, is that it means the crypto will be shifting from proof of work (PoW) to proof of stake (PoS).
PoS allows crypto miners to mine or validate block transactions based on the number of coins a miner holds. PoW is the original consensus algorithm in blockchain technology, which is used to confirm transactions and add new blocks to the chain.
PoW does require huge amounts of energy, whereas PoS gives miners power based on the percentage of coin held by the miner. Bitcoin (BTC) runs on a PoW system.
Onigbanjo labels this change a “key benefit of EIP-1559, as it will help to reduce congestion and help users stop overpaying for transactions during such oversubscribed times” – as well as reducing the amount of money miners receive during “peak periods”.
It’s more evolution than revolution
Katharine Wooller, managing director (MD), UK and Ireland at crypto wealth platform Dacxi, told Currency.com that EIP-1559 should be seen as more “evolution than revolution”.
The Dacxi MD said that EIP-1559 “is designed to both make fees more transparent and facilitate transactions in a more time-controlled manner”. She added: “As such, there should be a benefit to users and greater predictability for the mining community.”
Wooller does go on to say, however, that “like most protocol changes, the full impact will take a while to shake out”. She further explained that EIP-1559 will impact “multiple parties”.
Regardless of professionals’ views on EIP-1559, Wooller said: “It is without doubt yet another encouraging sign of the cryptocurrency universe growing in maturity.”
Still, some see EIP-1559 as “controversial”
Aleksandr Smirnin, chief operating officer (COO) at CryptoWallet, an end-to-end crypto banking and commercial solution, told Currency.com: “EIP-1559 is a somewhat controversial update to the Ethereum network.”
The new upgrade means some of the ETH paid to miners will now be “burned”, and thus miners will receive a loss of revenue. Before the EIP-1559 update, those who create transfers or transactions on the ETH blockchain pay a “gas fee” in ETH for miners to process their transactions, yet without knowing the exact price to pay beforehand.
To assist with the transaction getting processed, users may overpay to ensure the transfer goes through. Other users encounter uncertainty as to whether the transaction will go ahead smoothly and in a timely fashion.
The idea is that this will enable clear pricing on a base transaction fee paid to miners in ETH. Still, an amount of the ETH tokens will be burnt and taken out of the system permanently.
EIP-1559 will reduce the supply of ETH and the income of miners. This, in turn – according to Smirnin – makes ETH “scarcer, increasing its buying power and reducing network transaction fees”.
Smirnin does believe that EIP-1559 “is a hotly anticipated update that ushers in a new and exciting era for ETH, possibly posing a new challenge for Bitcoin”.
The COO also draws the comparison between EIP-1559 and the halving of BTC. The last BTC halving took place in May 2020, with the number of BTCs entering circulation every 10 minutes dropped by half to 6.25 from 12.5. The idea behind this move is to drive up the price of BTC.