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Highly Anticipated Ethereum Fee Model Upgrade is Expected in 2021

Altcoins 2021/01/21 13:48 by Samuel Wan

High gas prices are a thorny subject for the Ethereum community. The issue gained widespread coverage during the summer of DeFi when demand and network usage were sky-high, resulting in less than palatable charges.

Ethereum Improvement Proposal (EIP) 1559 is touted as a solution to the problem, but it wasn’t clear whether it would see a rollout. However, an update from the dev team indicates it could be coming out in 2021.

Ethereum Gaining Ground Against Bitcoin

An amazing week for Ethereum sees its price exceed the previous all-time high, set back in January 2018. Despite not closing the daily above that level, the momentum is still very much with the leading altcoin.

For example, Ethereum’s daily volume of transactions is now 30% greater than the Bitcoin network. As a further indication of topping the market leader, the ETHBTC trading pair soared 11% on making a new all-time high against the dollar.

With the next milestone target, ETH 2.0 Phase 1 scaling through shards, scheduled to roll out sometime this year, thoughts turn to the current chain’s state.

The rising price of Ethereum has resulted in surging gas fees. So much so, it’s emerged that, for three consecutive weeks, the use of Tether on Tron has surpassed Ethereum.

As such, the issue of high gas fees is making its presence felt once again.

EIP 1559 in The Works

High gas fees are something the Ethereum team is well aware of. In fact, EIP 1559 was first floated back in June 2018.

Although Ethereum Co-founder Vitalik Buterin gave his nod of approval to the proposal, internal struggles had always cast doubt on whether it would see the light of day. Namely, does the development work justify releasing an upgrade that ETH 2.0 will supersede anyway?

However, the latest update by ETH Core Developer Danny Ryan states it’s actively being worked on, and by his estimation, will be ready to roll out this year.

“R&D on this item has picked up steam in the past 12 months, and we optimistically will see 1559 fee mechanics on mainnet in 2021.”

Fee Mechanism Reform

EIP 1559 does two main things. It establishes a “market rate” for block inclusion and introduces a transaction fee burn mechanism.

The present fee structure works under an auction system. Here, users submit their gas price bids to have their transactions executed by a miner. However, miners tend to select transactions that will result in them earning the highest fees.

Under EIP 1559, a variable base fee structure comes into play. This will move higher or lower according to network congestion. Therefore, instead of a system swayed by users’ willingness to overpay, EIP 1559 establishes a market rate for gas fees.

Miners keep an inclusion fee for their trouble, but the protocol will burn the base fee. This brings in a whole new dynamic to Ethereum’s monetary policy. Not only are miners disincentivized to manipulate gas fees, but burning also adds a deflationary mechanism to the mix.

The upshot to all of this is a more predictable fee structure and an overall fairer network for all stakeholders.

Ethereum daily chart

Source: ETHUSD on TradingView.com

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