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Ethereum’s Design Choices Are Inherently Political

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Nic Carter

In early August, Ethereum’s long-awaited London upgrade went into effect. It contained a package of Ethereum Improvement Proposals, or EIPs. The most consequential of these was EIP 1559, which changed the core fee logic.

Prior to the change, Ethereum blockspace was auctioned off on a “first price” basis – effectively users would have to make educated guesses regarding the likely clearing price of blockspace. For the sake of guaranteed inclusion, they’d often end up overpaying. This was seen as inefficient.

Thus EIP 1559 was proposed: every transaction in a block would pay the same price. The objective was to simplify fee logic, especially for blockchain developers, increase predictability, and reduce the variance of gas prices.

Based on the data we have so far, this looks to have worked. Fees are indeed less volatile than they were before. They are, however, no cheaper, to the chagrin of some users. Ethereans close to the process insist that the tweak was never intended to cheapen blockspace. Insiders blame the surge in fees mostly on NFT mania. Indeed a cursory analysis lends some support to this theory.

The latest surge of NFT enthusiasm happened to coincide with the rollout of EIP 1559, so we won’t be able to tease apart the causality until this NFT episode subsides. Early analysis supports the idea that EIP 1559 has instituted a de facto near-term price floor on the price of gas, effectively eliminating periods of downtime (typically at night or on the weekends) when blockspace is cheaper.

Based on a visualization of gas prices post EIP-1559 created by data scientist Takens Theorem, it looks like the change eliminated much of the downside volatility in gas prices but did not eliminate the right tail. Extreme fee spikes during periods of congestion still happen.

Removing the left tail of fees disempowered users who would set low “limit orders” on gas and were happy to wait for it to clear. Effectively, this change homogenized the way users had to bid on gas, pricing out those who were price sensitive and preferred to wait for low gas prices.

And then there’s the fee burning. The base fees are now burned, while miners collect some residual “tips.” This mechanic was included for a couple reasons: first of all, to privilege Ether as the sole native currency of Ethereum, similar to the manner in which only USD can extinguish a tax liability in the USA. Additionally, it eliminates the attack mode in which miners might stuff blocks with high fee transactions to bid up the clearing price of gas and force users to pay extortionate fees. This fee recycling attack doesn’t work when the base fees are burned.

But the fee burning design choice has economic consequences, too. For one, it disadvantages miners, stripping away a good chunk of the revenue they were previously earning. As a consequence of the change, only about a quarter of the fees users pay to access the blockchain today go to miners. Previously they earned them all.

The remainder are burned, effectively constituting an ongoing “stock buyback” and retirement. This has amounted to over 300k ETH burned in the 41 days since the change, representing a reduction of........

© CoinDesk

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