Introducing the Ethereum Gas Limit Project (EGL)
The Ethereum Eagle project (EGL) is a community led effort focused on solving the misalignment of incentives and lack of transparency between the community and miners in a way that maximizes value for all Ethereum stakeholders. EGL follows in the footsteps of Flashbots by tackling protocol level attributes without requiring a hard fork.
TL;DR: The DeFi boom resurfaced the latest iteration of the long-standing debate over the “right” gas limit — striking the ideal balance between a:
- Lower gas limit, so anyone can run a node
- Higher gas limit, so anyone can afford transaction fees
EGL proposes a solution to allow coordination and incentives for miners to listen to the community on their desired gas limit.
The 2020 DeFi boom brought more money and more users onto Ethereum. On Jan. 1, 2021 there were ~90,000 active wallets and $15 billion of locked value; today there ~2,500,000 active wallets and $55 billion in locked value. More users inevitably means more transactions. But this increase in transaction demand has not been met with equal increase in transaction supply (e.g. larger blocks).
The result is higher gas fees, often so high, Ethereum becomes unusable.
Here’s the problem: the gas limit (Ethereum’s “block size”) is controlled by the mining pools, not the community. And miners setting the block size isn’t working out well because there is a misalignment of incentives, and a lack of clarity on what is the “right” limit.
To make things worse:
1. lower gas limit (and higher gas fees) means more short-term income for miners, and adjusting the gas limit up generally translates to earning less, without clarity when the demand will make up for it.
2. A higher gas limit may push Ethereum to require more than the average consumer PC to run a node, preventing regular users from running their own node. This is an incentive and a “pricing” problem, and it requires a solution to allow Ethereum to continue its growth safely.
We propose EGL, an on-chain coordination token that allows the ETH ecosystem to signal its collaborative desire (under the guidance of the core devs) and incentivizes mining pools to follow it. EGL allows holders to vote on the right gas limit, and provides pools with an economic incentive to listen and gradually adjust the gas limit.
We originally posted about EGL on ETH Research. Here we will expand on that post with more details on EGL and it’s design.
Gas Limit Background
The problem is simple: if more transactions want to be included in the block then available space, fees spike as users outbid each other to get their transactions inside the block. Different chains have taken different approaches to governing the amount of block space.
Bitcoin gave control over the block size to the protocol developers. On the face of it, this makes a lot of sense. Those building the clients that run the system should have some technical decision making power. However, philosophical disagreements on what is the right block size led to internal fights among developers and a chain split: large block advocates left to form BCH and small blockers stayed with BTC.
Ethereum attempted a different paradigm — what if we gave control of the block size to miners? In Ethereum, the miner of each block is allowed to change the subsequent block size up or down by 0.1%. The result is that the gas limit is a bit jittery over the short run (see below), but hovers around the gas limit targeted by the majority of the hash power.
Thus, over time, a majority of miners must target a certain gas limit to achieve a new block size level. This solution transformed a philosophical question to an economic one — miners ought to act in their financial interest, or so it was claimed, and their investment in mining equipment indicates a long-term commitment to the value of ETH.
This solution worked for a while, but the block size debate has resurfaced with the aforementioned DeFi boom. Unfortunately, this time the community is arguing over long Twitter threads on what the “right” answer is, while those with the actual power (i.e. miners) are notably absent from the conversation.
Instead, miners coordinate to increase the gas limit when they so choose. You can see from this chart of the historical gas limit that instead of miners independently voting on the optimal block size over time for Ethereum, they instead act like a cartel, agreeing in private on the optimal size and then all voting it into existence (shown below as jumps in gas limit).
Why don’t the miners just “listen to the community?”
For one thing, it’s unclear what the community consensus is. Some core developers argue to reduce the gas limit, while others believe it should remain constant, while still others argue it should be increased, as well as many fee-paying users. Moreover, those with the loudest voice do not necessarily reflect the majority.
Another reason is miners are averse to increasing the gas limit because they may lose revenues in the short term. This is because miners may be at a local maximum where blocks are full and fees are high. However, if miners increase the block size, fees may come down in the short term, but demand that was initially priced out may start to flow in, increasing profits over the long term. It’s unclear what the net effects are, and there’s a strong bias toward maintaining the status quo. EGL provides a buffer to unstick miners from this position.
Blocks are full today, and even though it seems intuitive that increasing the gas limit may yield more value (more transactions at lower fees coupled with a higher ETH price), the economics are complex — and with ETH2.0 on the horizon, to most miners the answer is simply: why rock the boat? The block size mechanism doesn’t push miners to take into account the users’ utility and balance it with the effect on the needed hardware to run a node.
It’s time for another iteration in this experiment, a third way.
It is clear core devs should have a say, but they shouldn’t be the only voice. This is why people are excited about Proof of Stake — moving some of the power to those most invested in the protocol. The power should also probably not sit only with miners whose economic incentives may not align perfectly with the community. Our proposed solution is about creating a mechanism for anyone in the community to participate and influence the block size, using economic incentives (skin in the game and markets) to induce good behavior.
So, to recap:
- Is faced high or spiking gas fees. This is influenced by the gas limit, which is controlled by mining pools
- Some voices rant on twitter about fees and few even pinpoint that the mechanism to change it is the gas limit
- These voices are not homogenous — different actors have different ideas of what the “right” gas limit is (some even want a lower limit).
- Miners don’t control the gas limit, mining pool admins do (since they build the block).
- Three mining pools control 55% of the hash power (top six control 70%) and effectively the gas limit.
- Pools have been increasing the gas limit at will, coordinating with each other, and may believe that increasing the gas limit would result in them making less money, even when safe.
- Pools want more guidance from the community on the optimal level (F2Pool even tweeted this!).
- Communication between the two is not working.
EGL: a coordination token to allow holders to vote on what their individual desired Ethereum Gas Limit is, and reward miners for listening to the community and user preferences.
EGL creates an economic incentive for the community to research, vote and ultimately discover what the “economically efficient” gas limit is and rewards mining pools for listening and taking the economic risk of listening to them.
EGL builds on Ethereum’s experiment of moving some parameters away from core devs to miners, by giving some of that power back to not only core devs, but also the entire community.
Key Design Choices
Several key design choices are worth emphasizing:
Launch: EGL is designed to solve a coordination problem on Ethereum and thus it should be owned by the Ethereum community. Any ETH holder can participate in the Genesis by staking ETH and receiving free EGLs. At the conclusion of the Genesis lockup, you can claim your staked ETHs and free EGLs.
Core Devs Guidance. Core Devs have the greatest insight to the nodes’ technical limitations, and their opinions should carry significant weight. Thus, EGLs will be awarded to all interested core devs, both to directly affect the EGL vote, but more importantly, to signal to other actors their respective opinions.
Carrot-only Incentive. EGL rewards mining pools for adjusting the gas limit according to the ecosystem’s collaborative desired gas limit — that’s the “carrot”. But there is no “stick” forcing them to follow the EGL desired gas limit, EGL cannot force pools to adjust their gas limit to levels they consider unsafe.
Creating Value for EGLs. EGL is designed to quickly deploy an ETH-EGL Balancer pool, and for multiple weeks to award EGLs almost exclusively to mining pools, which they can only collect by following the EGL desired gas limit. This is intended to provide the best setting to spin the flywheel: “EGLs have value” -> “pools follow EGL” -> “EGL works so actors vote ” -> “EGLs have value”.
Incentivize Large Actors Participation. Optimizing the gas limit to its maximal safe value creates value for the entire ecosystem, but also opens the door for the tragedy of the commons; every actor will ask herself why should it fall upon her to invest capital and effort to hold EGLs and vote. To incentivize the participation of tier-1 actors, who benefit the most from EGL, EGL leverages a two-steps mechanism.
- For a weekly tally to pass, a minimal threshold of EGLs must participate in the vote, and this threshold gradually increases over time.
- If the threshold is not met, the desired gas limit does not remain unchanged. Instead, it is set to revert 5% of the gas limit. Thus, failure to participate in voting begins to revert the value EGL creates.
The rationale behind this unconventional design choice is that large actors (be them centralized like Coinbase or decentralized like the Uniswap Treasury and LPs) may benefit greatly from EGL, and may be significantly better off locking some capital in EGL and vote over losing the value they capture from EGL.
What about EIP-1559?
EIP-1559 changes how gas fees are paid to miners. Specifically, with EIP-1559 users will pay a base fee + tip where the base fee will be burned (i.e. the miner does not get it) and the tip is paid to miners when congestion is high to incentivize inclusion.
As most people know, EIP-1559 doesn’t solve this whole “fees are high” thing. It does make fees more predictable and works better than the first price auction (FPA). However, when many people try to send their Txs and the capacity is limited, the most valuable Tx will outbid the less valuable (i.e. pay a higher fee).
More importantly, EIP-1559 completely removes the incentive for pools to increase the gas limit, even if everyone agrees it is completely safe. Why should they? Producing larger blocks would only increase their risk of uncle blocks, but would hardly increase their revenues (since fees are burned).
As you can imagine, some miners didn’t like having their fees burned.
If anything, it disincentivizes it because a smaller block means more congestion and miners make higher “tips” when there is congestion — just like in the current fee auction.
There are a few other details (Hasu has a good article analyzing EIP-1559) but the takeaway is that EIP-1559 doesn’t solve “high fees”, EGL actually provides a missing piece to EIP-1559 — an incentive for pools to adjust the gas limit as long as it’s safe.
How EGL Helps
We realized that EGL might be the perfect bridge to smooth the transition to EIP-1559. EGL aims to reward pools substantially, potentially similarly to their expected revenues from fees, thus it might allow for pools to maintain their expected revenues while benefitting users with EIP-1559 superior monetary policy and fee predictability. This is possible since the value created by EGL should suffice to compensate pools, alleviating the argument whether the value from fees should compensate pools or be burned.
ETH 2.0 & The Merge
“The Merge” is the first step in transitioning ETH to PoS, confirming ETH blocks in the ETH2 consensus. This is huge for ETH, but does not mitigate the gas limit issue. Validators will now increase/decrease the gas limit, just like miners are currently doing. Furthermore, the burden to figure out the “right” gas limit will now shift from the centralized mining pools to (hopefully) more decentralized validator operators, increasing the need for a coordination tool such as EGL. Thus, ETH 2.0 does not solve this problem, it just moves it to a different set of block producers (validators).
The DeFi boom introduced many new users to Ethereum and resurfaced the debate about what the “right” gas limit is. EGL is a community led effort focused on tackling this problem and it’s respective protocol level attribute (the gas limit) without a requiring a protocol change.
EGL introduces an on-chain coordination token that allows the ETH ecosystem to signal its collaborative desire (under the guidance of core devs) and incentivizes pools to follow it.
Join the EGL community today and vote on your desired gas limit.
Thank you to Vitalik, F2Pool, James Prestwich, Joey Krug, BlockTower, LightClients, and many, many more who took the time to discuss and provide valuable feedback.