EIP-1559 Explained: Will Gas Fees Drop?

ResearchAug 10, 2021
EIP-1559 Explained: Will Gas Fees Drop?

On August 5, Ethereum successfully rolled out its latest update dubbed "London Hard Fork," containing five Ethereum Improvement Proposals (EIPs), including the most anticipated one - EIP-1559. What does this mean for ETH and the ecosystem as a whole?

EIP-1559 is said to make fees in the Ethereum ecosystem more predictable - previously, the fees were decided through the auction system, making them fluctuate massively. The latest update will change it by replacing the old system with a "base" fee, where participants can tip a miner for speeding up the process.

At the same time, EIP-1559 constantly appeared in the news and was a subject of hot discussions between crypto enthusiasts, traders, developers, and miners. Amongst many reasons, the one stands out the most - a massive 35% loss in miners' revenue. However, moving from PoW to PoS can potentially mean ETH will become deflationary due to token burn. In a nutshell, every transaction will remove a certain amount of tokens from the overall supply. If demand remains high, the market will run into ETH scarcity and thus push the price up.

However, the Ethereum blockchain is the most expensive blockchain in the world. Fees are so high that users have to pay $17.6M a day to make transactions. In contrast, Bitcoin's overall daily fees amounted to $392K on August 2.

While fees will become easier to track, they will still remain high. Market participants are waiting for Ethereum 2.0, which should be able to take on the challenge. Ethereum 2.0 is built around "sharding", a concept of dividing blockchain into mini-blocks for faster transactions. It can potentially make the Ethereum blockchain more scalable. Yet, with limited news, predictions are wild.

Ethereum is an entire ecosystem that DeFi projects use, but not the only one. The quick rise of Binance Chain (BEP-2), a blockchain with similar purposes or trades, is taking on the challenge of becoming the best DeFi solution. Binance's solution is faster and less costly, making it a strong competitor. So far, market participants are watching the race, waiting for the winner to emerge.

At the moment, it's too early to make predictions on future ETH prices and development. Changes are big and new. For now, it remains the second most capitalized cryptocurrency.


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