EIP-1559 & EGL ❤️
EIP-1559 and EGL are made for each other. Here’s why.
- EIP-1559 is focused on gas price predictability but doesn’t incentivize miners to listen to the community (including reducing congestion)
- EGL incentivizes miners to listen to the community
- EIP-1559 + EGL = price predictability + community influence
What is EIP-1559 and how does it work?
EIP-1559 was created to make estimating gas fees easier.
The issue is that some users pay a lot more than others because of how the fee auction is structured.
Eric Conner explains:
“…miners select transactions ranked by the highest fees which results in many users grossly overpaying…In many cases, we can see a large divergence of transaction fees paid by different users in a single block, suggesting that many users often overpay by more than 5x.”
This is the problem EIP-1559 is trying to solve — helping smooth out the price most users pay (less variability) and making such a payment more predictable.
Unfortunately, this does not solve the fee congestion problem — fees spike when a lot of people are trying to use the network at the same time.
Since the DeFi boom that began in the summer of 2020, the network has seen huge spikes in gas prices (in gwei).
Since then blocks have been full (i.e. block utilization has been ~100%).
When many users all want to get into the next block and that block space is limited and taken up (utilization is full), users begin to outbid each other for priority. Said simply, when transaction demand is greater than block space, fees spike and we have congestion.
The problem is we’re already starting from a position of full blocks. When time sensitive transactions arise (e.g. an arbitration opportunity is found, a token is dropped, positions are liquidated), users start to outbid each other for priority and fees spike.
How does EIP-1559 deal with congestion?
EIP-1559 introduces the concept of “tips.” In times of high congestion users can submit a tip along with the base fee to incentivize miners to prioritize their transaction. This is basically what we already have — if you need your transaction mined now you pay more. The difference is the base fee. Before, there was no concept of base fee. You priced based on an auction, and some people paid more than others for transactions that were not time sensitive. Now the base fee should make it so if you are not time sensitive there is a minimum amount you can pay and wait for your turn.
But during congestion, the problem is the same. Block space is limited and you must pay for priority.
So who controls block space? Miners. Specifically, mining pools. The top 4 mining pools control 70% of the hash rate and thus the block space. They set the block gas limit, currently at 15M, with every block they mine. Any miner can increase / decrease the block gas limit by .1% from the previous block when they mine a new block.
EIP-1559 does not remove this power; if anything it incentives miners to constrict block space. This is because EIP-1559 burns the base fee. That means unless there is congestion, miners don’t earn any money from fees.
As mentioned, the new fee system has a base fee and tips. All transactions include a base fee that gets burned, and users can include tips during times of congestion to get transaction priority. So, in normal non-congested times miners earn NO income from fees because the base fee gets burned. If a miner wants to increase her fee revenue, she is incentivized to cause congestion and collect tips. To make matters worse, with more congestion, tips increase exponentially.
So how would a miner do this?
Before EIP-1559, miners decided on the block gas cap (gas limit) as explained above. After EIP-1559, they will decide on the block gas “goal.” Blocks can be larger than the goal, but that will push fees up until the goal is met (i.e. transactions will become more and more expensive so that fewer and fewer users want to be included in the block, and one ends up mining a block that meets the goal). If blocks are smaller than the goal, fees go down, allowing cheaper transactions to be mined, until the goal is met (i.e. it becomes cheaper and cheaper to transact, so more and more users want to be included in the block). Miners still decide the size, only it moves from a static cap to an elastic goal.
One option miners have is to make the goal smaller (say ~10M gas) and mine bigger blocks to collect more tips. They may want to cause congestion.
Fly in EGL.
EGL might be the perfect bridge to smooth the transition to EIP-1559. EGL aims to reward pools, potentially similarly to their expected revenues from fees, thus it might allow for pools to maintain their expected revenues while simultaneously benefitting users with EIP-1559’s superior monetary policy and fee predictability.
This is possible since the value created by EGL should suffice to compensate pools, alleviating the argument about whether the value from fees should compensate pools or be burned.
How does EGL work?
EGL is a coordination token that allows holders to vote on what their individual desired Ethereum Gas Limit is, and rewards miners for listening to the community and user preferences. It creates an economic incentive for the community to research, vote on and ultimately discover what the “economically efficient” gas limit is and rewards mining pools for listening to them and taking on the associated economic risk.
Each week EGL holders can vote on their desired gas limit and as miners mine blocks that listen, miners can earn EGLs.
Anyone in the ETH community can participate in EGL and join the Genesis slated for mid-July.