Combining the burning effect of EIP-1559, after switching to the PoS consensus mechanism, Ethereum’s deflation can be expected. But in fact, inflation is not all harms and no benefits. Appropriate inflation is also conducive to economic and ecological development.
Written by: Polkadot Ecological Research Institute
background
As an important step towards making Ethereum easier to use, the London hard fork is essentially an EIP-1559 upgrade that adjusts the gas cost of the Ethereum network to cope with the increasing miner fees in use by users (the goal is so).
Let’s not talk about whether the current cost of using the Ethereum network has been reduced, but from another set of data we can see something more interesting, that is, since the Ethereum EIP-1559 upgrade, as of August 15th, the Ethereum has burned more than 45,000. ETH (data from ultrasound.money).
According to the current burning rate, it is estimated that 800,000 to 2.4 million ETH will be burned in 2021, and nearly 2.5 ETH will be burned every minute . This sounds like an exciting number. After all, every ETH is burned . This means that there is one less ETH in circulation in the market.
Literally, we judge this statement to be supportive. After all, the supply and demand principles of economics are really easy to understand, but as a calm observer, we have to return to an objective perspective to look at the possible impact of the London upgrade.
What is the Ethereum London upgrade?
As the opening of the smart contract, Ethereum, which laid the foundation for the emergence of DeFi and NFT, has grown vigorously with the application of blockchain technology. However, everything is in dynamic change. If it is a pool of stagnant water, there will be no waves, it will be abandoned by the times.
Based on this, Ethereum has also carried out rounds of upgrades to optimize its performance to make it more in line with the needs of the times. Every upgrade of Ethereum will have a significant impact on the entire encryption field, and this time the London upgrade that has attracted much attention from the outside world is no exception.
This upgrade can be described as a twists and turns. First, the joint protests of the miners group and the implementation of the loopholes discovered two weeks ago made this London upgrade seem a bit hasty, but in fact, the Ethereum London upgrade has been prepared for three years (with EIP- 1559 was first proposed as a starting point).
The trend of history will not be reversed. Ethereum is one step closer to the ETH2.0 era, and the era of Ethereum PoS is also coming.
So what exactly did this London upgrade do? Although this London upgrade is also a hard fork upgrade, it did not generate new tokens. The update is only for Ethereum nodes and clients.
It mainly includes five important community proposals: (1) Handling fee improvement plan EIP-1559; (2) BASEFEE operation code EIP-3198; (3) EIP-3529 to reduce gas fee refund; (4) Rejection EIP-3541 of the new contract beginning with the 0xEF byte; (5) Delay the difficulty bomb to EIP-3554 on December 1, 2021.
Below we will disassemble them one by one.
1.EIP-1559
After the implementation of EIP-1559, the Gas fee will be sent to the network itself as a basic fee (basefee) and destroyed. Users only need to pay a certain amount of tips to the miners. This proposal cancels the gas fee auction system , thus changing The transaction model of the entire ecosystem.
The basic fee will be dynamically adjusted according to the current usage rate of the network, and this part will be directly destroyed . The basic logic is that when the block usage rate of Ethereum exceeds 50%, the basic fee will increase; when the block usage rate is lower than 50%, the basic fee will decrease, and the basic fee will fluctuate within a small range.
EIP-1559 clarified three things:
1. Clearly link the cost of Ethereum with the decentralized application protocol itself;
2. Eliminate the uncertainty of free market gas fees and reduce transaction waiting time;
3. Add a statement similar to the limited supply of Bitcoin;
Specifically, the existing Ethereum is too difficult to use, because the Gas fee required for each transfer is a sealed buy-it-price auction model with high price priority. For users using the Ethereum network, they often encounter The estimated gas price is not allowed, and all the transfers initiated by him have been pending (pending).
If you don’t cancel the transaction, you can just wait. It takes a lot of time and energy to do it and you will pay more gas fees. The gas fee is often high throughout the network. One of the reasons is the existing gas fee mechanism. The problem. There may even be cases where the sky-high gas fee was paid due to improper operation (the transfer amount and the gas fee were incorrectly written, and the transfer amount was only 0.01 ETH, but the gas fee was paid 10 ETH).
Therefore, the core purpose of EIP-1559 is to improve this situation, greatly increase transaction efficiency, and make user experience better. When users transfer money, they have the basic rate as a reference price, and then add tips (Tips) as appropriate to complete the transaction, saving money and worry. On the other hand, users don’t have to worry about making sky-high gas fees anymore, they only need to set the maximum amount they are willing to pay to get the transaction package.
The simple understanding is that the EIP-1559 proposal optimizes the composition of transaction fees, which is beneficial to a wide range of ordinary users and developers, but to some extent harms the interests of miners . Because the gas fee is an important part of miners’ income, only tips are left after the upgrade in London.
what does that mean? Although Ethereum has not expanded due to this, the gas fee is still dynamic. When the network is congested, gas may still be high, but its actual cost is reliable and predictable , and this provides a better development environment for Layer2.
At the same time, as we all know, every time a new block is created, two new Ethereum tokens will be generated, which brings a certain degree of inflation, and this also causes investors to worry, because behind the high inflation rate is Increase in financing risks.
We mentioned in the above introduction that after the implementation of the EIP-1559 proposal, the basefee in the gas paid by the user will be sent to the network itself for destruction, and will be permanently removed from the total circulation effect of ether. In other words, it will offset most of the inflation and ensure that miners will not artificially block the network in order to obtain more incentives.
The implementation of EIP-1559 can make the inflation rate of Ethereum and Bitcoin basically equal , and this has also encouraged more individual and institutional investors to join the Ethereum ecosystem.
In the short term, EIP-1559 does harm the interests of miners, but in the long term, EIP-1559 is conducive to the long-term development of the Ethereum ecosystem.
2.EIP-3198
So what is EIP-3198?
We can simply think that EIP-3198 is designed for EIP-1559. By adding a BaseFee opcode, it returns the basic cost of the exchange when the transaction is executed in the block. The smart contract can access this value on the chain. .
This ensures the reliability of BaseFee fees and facilitates the verification of fraud proofs . At the same time, due to its accessible characteristics, it provides conditions for the emergence of decentralized gas fee derivatives and further enriches the DeFi ecosystem. Therefore, EIP-3198 is an important part of reducing EIP-1559 vulnerabilities.
3.EIP-3529
EIP-3529 canceled the gas return of the opcode selfdestruct and reduced the gas return of the opcode sstore, that is, reduced the Ethereum Gas refund. How do we understand this?
First of all , the original intention of Gas return is to incentivize developers to clear the state when possible , but in fact this led to the creation of Gas Token by developers in order to obtain more incentives, resulting in an increase in the size of the state.
At the same time, EIP-1559 brings an additional block size difference, and the Gas return is reduced from 50% to 20%, which can be partially offset, which is equivalent to reducing the network transmission pressure on the node and stabilizing its decentralization ability And safety.
4.EIP-3541
Unlike EIP-1559, EIP-3198, and EIP-3529, which have improved gas fees, EIP-3541’s rejection of new addresses beginning with 0xEF bytes seems to be just a simple change, but in fact EIP-3541 also has important features. significance.
The proposal will allow the new contract to 0xEF byte beginning can not be deployed without affecting existing contracts, it laid the foundation for future EIP-3540 EVM broader improvement proposal.
EIP-3540 introduces “a scalable and versioned version for EVM that can be verified during deployment” to better separate code and data, shorten the client run verification time, and verify the code of Layer 2 , Multi-byte opcodes and many other aspects are of great significance .
However, EIP-3540 does not match contracts beginning with 0xEF bytes. Contracts beginning with 0xEF bytes can only be reserved as a way to be recognized by smart contracts that are semantically consistent with EIP-3540. Therefore, contracts beginning with 0xEF bytes are rejected The new contract is of positive significance for the overall optimization of EVM.
The implementation of the EIP-3541 proposal also allows users to see the dawn of EVM improvement.
5.EIP-3554
As we all know, the difficulty bomb is a mechanism introduced by Ethereum , that is, as the difficulty of mining increases, the time required to dig a new block on the Ethereum blockchain will increase, thereby artificially slowing down the issuance of Ethereum . This is designed for the transformation of Ethereum to PoS equity proof mechanism algorithm.
When Ethereum changes from PoW proof of work to PoS proof of stake, the behavior of miners will be frozen. However, because such a transition is not yet ready, Ethereum chose to delay it.
In fact, it has experienced three long delays in Metropolis (EIP-649), Constantinople (EIP-1234) and Mur Glacier (EIP-2384) in the past. This time, the core developer of Ethereum has chosen A short time delay, only to delay the time to December 2021, can also show that the transition of the consensus mechanism is already on the line. In the near future, we can see the transition of proof of rights.
What impact will the upgrade of Ethereum London bring?
It is rare that we can see such a well-known project as Ethereum modify the economic model. In fact, the modification of the economic model is not the first time. Because EIP-1559 was proposed a few years ago, and EIP-1559 solves many problems. Problems that the project must face: low transaction efficiency and fraud by miners.
Therefore, around October last year, Filecoin also made minor adjustments based on ETH’s EIP-1559, and finally incorporated EIP-1559 into Filecoin.
It has been about ten months since Filecoin launched EIP-1559. What effect EIP-1559 has brought to Filecoin, we can use it as a reference to see what effect may be achieved after the upgrade of Ethereum London.
First of all, it does bring about fluctuations in the handling fee rate, and with the basic fee rate as a guide, all participants are more confident about how much transfer fees they spend when making a transfer. Juan, the founder of Filecoin, also wrote an article ” EIP-1559 in Filecoin” to express the effect of EIP-1559 on Filecoin.
EIP-1559 has many commendable features consistent with Filecoin’s design considerations:
Efficiency . EIP-1559 outlines a more effective gas setting and accounting mode;
User experience . Estimation and fee setting are relatively simpler than conducting a first-price auction;
The throughput of critical messages . The WindowPost message processing time in Filecoin is very tight, so it must be processed in a powerful support method that can solve the congestion problem. EIP-1559 provides higher reliability and throughput for this type of message;
Reward trading network . The entire network bears the cost of processing transactions, so it should be compensated accordingly;
On the other hand, we should also clearly distinguish between ETH and Filecoin. There are many differences between the two. The biggest difference is that the two processing subjects are different. For Gas , Filecoin is mainly for “storage + calculation”. In terms of proof method, ETH is mainly transaction-level information .
So what is the effect of actual ETH?
This is a picture taken by a well-known big V sacred fish in the industry. It shows that the burning ETH of a single block has reached 4 or 5, which exceeds the issuance speed of 2-3 ETH generated by a single block. Therefore, from From a numerical point of view, there will indeed be a deflationary effect.
There is another point worth paying attention to in this picture, that is, the Base Fee, which is the basic fee, which has also reached 200-300GWei. Therefore, from the actual situation, the London upgrade of ETH cannot fundamentally solve the high gas fee. Case. When there is a peak in demand, such as during the period of intensive NFT issuance, or during the period when DeFi is popular, the gas fee will still be affected by supply and demand, and the basic cost will also be pushed up .
Of course, when the demand is not strong, the ETH burned does not exceed the issuance, and the basic cost is not particularly high.
Therefore, in summary, this upgrade of Ethereum cannot fundamentally solve the problem of high gas fees. On the other hand, considering that the existing Ethereum is still a PoW consensus mechanism, after switching to the PoS consensus mechanism, Ethereum The inflation rate of the square will be further reduced, combined with the burning effect of EIP-1559, the deflation of the Ethereum will be expected to happen .
And because of this, because of the deflation of Ethereum, many well-known people in the industry have begun to pay attention to whether the market value of Ethereum will surpass Bitcoin. For example, BitMEX founder Arthur Hayes wrote an article to discuss the possibility of Ethereum’s market value surpassing Bitcoin. Goldman Sachs released a report in May, stating that Ethereum is the most “potential for practical use” of the blockchain, and its market value is expected to surpass Bitcoin. Pantera Capital founder Dan Morehead said in an interview that the upcoming London upgrade It will help Ethereum catch up with Bitcoin and make Ethereum more like a fixed asset.
But we have to admit that these are all speculations based on current developments. Whether Ethereum can meet everyone’s expectations in the future remains to be seen.
What impact will this Ethereum upgrade have on the Polkadot ecosystem?
According to the upgrade of Ethereum in London this time, we have seen the game between different stakeholders and the final effect, which also has many enlightenments for the development of Polkadot and its ecology. In addition, we can also dig out the beneficial aspects of Polkadot’s ecology by understanding its causes and consequences to summarize and absorb.
1. The upgrade of Ethereum does not solve the fundamental problem
Among the Ethereum London upgrades, EIP-1559 is the most dazzling, but the starting point of EIP-1559 itself is not to really solve the high gas fee. At the same time, the actual situation also shows that it cannot really solve the high gas fee. problem. Because even though the pricing mechanism of gas fees has been modified, their levels are still tied to the relationship between market supply and demand. With the continued popularity of NFT and DeFi, gas fees will still remain high.
The real way to solve this problem is to expand the capacity. This will have to wait until ETH is converted from the PoW consensus mechanism to PoS in order to fundamentally solve this problem .
Therefore, although this is a major upgrade, ETH still has not solved the fundamental problem. On the other hand, Polkadot itself is the consensus mechanism of NPoS. At present, it naturally has no troubles in terms of performance and high gas fees. However, the idea of ​​adjusting the economic model of Ethereum can still be used for reference.
2. Witness the power of governance
In fact, logically speaking, the upgrade of Ethereum implies a forced implementation, because it is an upgrade under the premise of harming the interests of miners, and the most important economic model is changed. However, in order to make Ethereum become Under the banner of “Better”, this major revision was finally passed through governance.
This also allows us to witness the power of governance, which means that when some projects have difficulties, governance can be used to promote the development of the project even if it harms the important interests of some people .
3. Inflation is indeed a problem, but it is not all harm and no benefit
From this Ethereum London upgrade, the EIP-1559 proposal is designed to burn the basic costs, which can bring deflationary properties to Ethereum. Combined with the actual data, it is indeed theoretically possible to achieve deflation. The big players in many industries have also expressed their appreciation for Ethereum after it has changed from the original inflation to deflation, and are very optimistic about its prospects.
In fact, there are some small discussions about the practice of burning the basic cost in this Ethereum upgrade. One of the discussions is to return this part of the basic cost to the DApp developers, which can further encourage practitioners to participate in the construction of Ethereum middle. And this kind of thinking, in fact, there are already projects in the Polkadot ecology that have been considered in this way.
Astar (formerly Plasm) is positioned as the center of a DApp, and its economic model is designed to allocate a part of the transfer fee to DApp participants, so that all DApp developers can build and share with Astar and enjoy the dividends of the entire ecological development .
Regarding part of the gas cost to the ecological construction part, Polkadot has also practiced it for a long time. The founder of Polkadot, Dr. Gavin, knows that the construction of an ecosystem is driven by time + funds, and ecological construction must require financial support. And Polkadot’s ecology cannot be supported by raised funds alone, so he cleverly designed the funds needed for ecological development into Polkadot’s own economic model, which is Polkadot’s financial treasury or Treasury. )mechanism.
Of course, Polkadot is the consensus mechanism of NPoS, and it will inflate by about 10% every year, but this part of the inflationary funds will not be completely given to the people who participate in staking. The remaining part will be combined with a part of transaction fees and node punishment, three parts The funds are pooled as the Treasury of Polkadot .
Due to the design of the mechanism, as long as Polkadot operates normally, the funds of the Polkadot Treasury will continue to accumulate. Polkadot’s treasury is managed by Polkadot’s parliament, and the funds held in it can be used to determine whether to spend through the formulation of expenditure proposals and governance, so as to provide financial support for projects or organizations that contribute to the Polkadot ecology. .
The national treasury is a budget period every 24 days. If the national treasury ends a budget period and does not spend all of its funds, part of its funds will be burned-resulting in deflationary pressure. The percentage is currently 1 on Polkadot. %.
Therefore, Polkadot not only considers collecting funds to incentivize the ecology, but also considering burning a part of it to cause a certain degree of deflation, but some people say that Polkadot’s 10% inflation is too high, but conversely, it only burns 1%. To no avail.
In fact, inflation does not have all harms but no benefits. Appropriate inflation is also conducive to the development of the economy . Nowadays, fast-developing countries will have moderate inflation. This is like raising and lowering interest rates by the central bank. It is for ecological development. Appropriate adjustments are needed. A static framework + dynamic fine adjustments may be a more reasonable way of ecological development.
