The upgrade of Ethereum Improvement Proposal [EIP1559] on August 4th came as part of the roadmap towards “the merge”, transitioning from a miner’s Proof-of-Work [PoW] protocol to Proof-of-Stake [PoS].
EIP1559: What changed?
Until recently, the Ethereum network ran on a protocol that allowed a fee structure to miners in the form of an auction. The highest bidder would be processed first. This and limiting block size have been significant causes of network congestion. The implementation of EIP1559 now has a predetermined base gas fee, and blocks can now fluctuate to double the size before the upgrade.
Reasons for its implementation.
- Fee volatility, when it comes to a user wanting to conduct transactions on the network, the unknown of your bottom line is not ideal. A new baseline fee structure will enhance network stability and democratize the processing of transactions previously decided by the miners.
- The block size always has had limited scalability and efficiency. Congestion would reinforce the previous issue of fee volatility as network delays coerced users to pay miners exorbitant fees to incentivize their transactions processed.
- While doubling will not solve the problem, it certainly is a good step in the right direction.
- Ethereum has an uncapped number of coins it produces with blocks mined; the upgrade now burns a portion of transaction fees, transitioning the Etherum network to a more deflationary model.
What are the ramifications to network miners, and where does that leave them with the imminent transition towards PoS?
There was much controversy before the upgrade by the miners as the profitability structure has now changed. With transaction fees now being burned, miners must now rely further on block rewards, tips and the value growth of Ether token itself. Luckily, (or inevitably) Ether has seen impressive returns this year, and even already, the burning of transaction fees in the form of tokens adds value by diminishing some supply.
The “Merge” towards the PoS system will be a massive game-changer for the Ethereum network. Benefits include further improved scalability, efficiency and, most notably, a significant reduction of energy consumption. The issue of Environmental, Social Governance [ESG} being the main driver for the entire network to what will be known as Ethereum 2.0.
PoS will, however, leave mining operations obsolete. So, where will that render the mining companies? Well, they may decide to transition mining other altcoins or adopt the new PoS protocol and gain the benefits of staking nodes that still will have significant rewards.
While these previous issues had remained stagnant until now, Ethereum has already seen competing crypto projects grow their market share with scalability, efficiency and minimal fees inherent in their blockchain structure.
To summarise: the network must do what is best for itself, its growth, and its usability for further adoption to occur seamlessly.