🎙 "It's Almost Like EIP-1559 Fixes an Economic Bug in Ethereum; More Usage Can Now Capture More Value:" Tim Beiko

In this week’s episode we speak with Tim Beiko, who organizes the Ethereum core developers calls and knows all the intricacies and latest development of the world’s most active blockchain. We spoke right after Beiko had proposed a date for the implementation of one of the biggest changes expected to happen to the Ethereum blockchain in recent history: EIP 1559. Tim explains in non-dev terms exactly how this change will reduce volatility in Ethereum gas prices and also reduce the uncertainty of whether user transactions are approved or not. Importantly, it also means that part of ETH paid per transaction will be burned, so that if demand for ETH and use of the Ethereum blockchain are greater than ETH issued, it should put pressure on the ether price to increase.

We also talk about the latest on the transition into ETH2, the timeline for the merge between the current Ethereum application layer and the proof-of-stake chain, and how Layer 2 solutions have made shards a nice to have and not a requirement for scaling. We also talk about Ethereum as a nation-state, and how radical economic experiments are its biggest exports.

The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau and Dan Kahan.

🎙Listen to the interview in this week’s podcast episode here:

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Camila Russo: So I usually start the show by asking guests to tell me about themselves and their background. But because we have breaking news that Tim proposed a launch date for EIP 1559, I want to start with that. Can you explain what EIP 1559 is, why is it important?

Tim Beiko: So yeah. Quick overview of 1559. It's a pretty big change to Ethereum and that's one of the reasons why people talk about it so much, because it affects a lot of things. But at a very high level, what it does is it makes it explicit in the protocol what the amount is that you should pay for a transaction. So right now, when you use Ethereum, everybody sets their gas price, but the protocol doesn't tell you what's the right gas price, right? The way that this happens is your wallet, say you're using MetaMask or My Crypto or something else, they'll look at all the previous blocks based on the data and how much people paid in those blocks. They'll try to come up with an estimate and they'll put that gas price on your transaction.

“Quick overview of 1559. It's a pretty big change to Ethereum and that's one of the reasons why people talk about it so much, because it affects a lot of things. But at a very high level, what it does is it makes it explicit in the protocol what the amount is that you should pay for a transaction.”

But very often that will be wrong in a way, right? Like, we've all had this experience, you set a transaction on MetaMask, it tells you it's going to confirm in two minutes, then you refresh the page, and now it's seven minutes. So then you're speeding it up. It's just a very clunky process. And one of the reasons for that is, like I said, there's no notion of the correct gas price in the Ethereum protocol today. So what 1559 does at its core is it adds this to every block. So every block will have a new value called the base fee per gas. And this base fee is the minimum that you need to pay for your transaction to be included in that block. So it makes it very easy that you can look at a block and say, okay, this the minimum price I need to pay.

So I'll just put that as my transaction fee and get my transaction included. There's a lot more nuance and subtlety, but that's kind of the gist of it. The first question people ask about that, it's like, well, you know, that sounds pretty simple. Why can't we just have that already? One big challenge in gauging what's the right gas price to give users is we need to figure out what's the demand for Ethereum block space right now? Because the supply of block space is pretty fixed. We know we have one new block every 15 seconds. The gas size is fixed every block. And right now all these blocks are full. So if you just ask the network what's the demand, it'll tell you a hundred percent, and that's not a very useful indicator.

So what we do with EIP 1559, the other big change is we make blocks twice as big. So say right now we have 50 million gas on main net. We'll expand it to 30 million and we'll aim to keep them only half full. And when they're more than half full, we'll just raise this minimum price. Kind of like Uber's surge pricing in a way, where if everybody wants to get an Uber at the same time, the price goes up to discourage people. But then the opposite is also true. So if we're less than half full, we'll just start lowering the minimum price. So this is the way by which we can gauge demand. And it has a nice side effect in that most blocks will always have extra room. Right now blocks are basically always full.

“Kind of like Uber's surge pricing in a way, where if everybody wants to get an Uber at the same time, the price goes up to discourage people. But then the opposite is also true. So if we're less than half full, we'll just start lowering the minimum price. So this is the way by which we can gauge demand. And it has a nice side effect in that most blocks will always have extra room.”

So when you set a transaction, you're kind of waiting. And if somebody bumps in line in front of you with a higher gas price, then you're waiting behind them. But with 1559, if you assume the average block is 50% full, it means when you send your transaction, the next block should have some spare room to include it, so you should be included right away. And so it should help the average users, assuming you're willing to pay the current price on the network, to get their transaction included much quicker. The last part of 1559 is the fee burn. That's what a lot of people focus on. But the reason for the fee burn is because we have this minimum fee that can go up and down, and we want to use this as a reliable indicator for demand on the network.

If we did not burn the base fee and we just sent it to the miner of the block, what the miner would do is they would fill the block with their own transactions so that it would raise the fee for everybody else, but then they wouldn't actually pay this fee because they would get the transaction fee back. So the original reason to have the fee burn as part of EIP 1559 is so the miners are indifferent. Whether the minimum price is high or low, they're going to get a small part of the transaction fees for every transaction. But it shouldn't be higher or lower based on the base fee on the network.

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