The fee for the Ethereum network has not dropped significantly. The era of deflation has not yet arrived, but it has successfully slowed down inflation.
Written by: William, working at Huobi Research Institute
Summary
From the data on the chain, there are currently four major phenomena that go against market intuition in EIP-1559.
First of all, the fee for the Ethereum network has not dropped significantly . The reason is that the “tax distortion” model commonly used in the market does not apply to the gas trading market, and the motivation of EIP-1559 is to improve efficiency rather than lower prices.
Second, EIP-1559 can tactically alleviate the problem of transaction congestion. After the London upgrade, the block capacity has increased significantly, which can alleviate the problem of transaction congestion to a certain extent. The main reason for the increase in block capacity comes from the particularity of the BaseFee price formula, which increases the average block usage rate from 50% to 51.7%.
Again, EIP-1559 did not cause deflation in Ethereum, but it succeeded in slowing down inflation. Judging from the daily output of ETH and the daily destruction of ETH, at least for now, EIP-1559 alone cannot achieve deflation, but it has successfully slowed down inflation.
Finally, after the upgrade of London, the income of miners did not drop significantly. Even if the price increase of ETH is excluded, the income of miners has not decreased significantly. The reason is that more than 80% of the transactions in the current block are generated in the original transaction (Legacy) mode, while the EIP-1559 transaction mode only accounts for about 20%.
It has been more than ten days since EIP-1559 went online. Frankly speaking, even though it has been successfully upgraded, EIP-1559 is still full of controversy. These disputes include the impact of EIP-1559 on handling fees, miners’ income, ETH prices, and so on. So what is the real situation? We might as well explore these disputes through on-chain data.
On-chain data 1: The fee has not dropped significantly
A big controversy in EIP-1559 is whether the proposal can reduce the transaction fee of Ethereum. According to the data on the chain after the successful upgrade in London on August 5th, if the transaction fee is priced in ETH, the handling fee for each transaction has not dropped significantly; even when priced in US dollars, the handling fee has increased due to the increase in the price of ETH There has been a certain degree of upswing.
There may be different opinions: the reform of the main gas auction mechanism of EIP-1559 affects the gas auction price, not the simple handling fee. Similarly, we can see from the data on the chain that before and after the London fork, the Gas auction price did not change significantly.
The above results are consistent with our previous research predictions. The reason is that the main purpose of the EIP-1559 proposal is to improve efficiency, not to reduce the price of handling fees. From the perspective of the motivation of the proposal, EIP-1559 is mainly to improve the current inefficiency of gas transactions from the following four aspects:
- The mismatch between the volatility of the transaction fee level and the social cost of the transaction;
- Unnecessarily delayed waiting for users;
- The inefficiency of first-price auctions
- The instability of the blockchain without block rewards
It is worth mentioning that when discussing the impact of EIP-1559, some users in the Chinese community like to use the tax distortion effect theory to analyze the problem, and the introduction of EIP-1995 may increase the gas price, reduce the gas supply and produce Problems such as deadweight loss.
However, the problem with the above analysis method is that it ignores the peculiarities of Ethereum Gas transactions. In the traditional analysis of tax distortion effects, the implicit assumption is that firms are all competing firms. At this time, the market supply curve is derived from the firm’s marginal cost curve, and the marginal cost curve of ordinary firms is a curve that slopes to the right. , So the supply curve in tax theory is a curve that slopes to the right (see the figure below).
The special feature of the gas transaction is that after the miners win the bookkeeping competition in each block, they obtain the monopoly of the gas auction, and the monopolist does not have a supply curve. The way that monopolists determine price or output is that marginal revenue (MR) is equal to marginal cost (MC); the special feature of miners is that the marginal cost of obtaining transaction fees is almost zero. Because the main source of income for miners is block rewards, the marginal cost in the short term mainly comes from electricity bills, and the impact of more or less of a transaction on the marginal cost of miners is negligible.
In addition, due to the existence of the auction mechanism, miners can achieve first-level price discrimination against users, that is, miners can set different prices for each unit of Gas according to the user’s willingness to pay. Therefore, as long as each user’s Gas price (P) is higher than the miner’s marginal cost (MC=0), then the miner will pack the transaction until the block Gas upper limit is reached. Even in EIP-1559, miners can only charge a small amount of TIP, or even no TIP, miners are still willing to package transactions (TIP≥MC=0). This also explains why after the implementation of EIP-1559, even if the Base Fee is destroyed, miners are still willing to package transactions.
On the other hand, it is biased to regard Base Fee as a kind of “tax”. Tax is based on the original price plus an additional value (P+t), which is an additional cost; while EIP-1559 is splitting the original price into two parts (P = Base Fee + TIP) . Therefore, the Base Fee under EIP-1559 cannot be regarded as a tax because it does not impose a cost burden on both the supplier and the demander. The only change that EIP-1559 brings is that the highest price that users are willing to pay to miners has changed from the previous Gas Price to TIP.
As shown by the data on the chain, several important conclusions drawn under the tax distortion theory: the increase in handling fees, the decrease in gas supply, and the appearance of deadweight losses have never actually occurred.
On-chain data 2: EIP-1559 can tactically alleviate the problem of transaction congestion
Since the London upgrade, another interesting statistic is that the average daily gas consumption of Ethereum has increased significantly. The average daily gas consumption has risen from 92 billion to the current 100 billion, which also implies the block capacity after the London upgrade. With a significant increase, the problem of transaction congestion can be alleviated to a certain extent.
So, what is the source of the nearly 10% increase in the block capacity of Ethereum? — The block relaxation mechanism design of EIP-1559.
As we all know, EIP-1559 uses two parameters to control the block size: Gas limit and gas target. Gas target is an ideal block space that Ethereum wants to maintain for a long time. It is 50% of the upper limit of Gas in value, and the average block utilization is controlled at 50%. In order to achieve this goal, EIP-1559 uses Base Fee to adjust:
- When the current usage rate of a block exceeds 50%, the Base Fee will increase proportionally (the upper limit of each block is increased by +12.5%)
- When the usage rate of the current block exceeds 50%, the Base Fee will increase proportionally (the upper limit of each block is reduced to -12.5%)
Further, the specific adjustment formula of Base Fee is as follows:
Here, b stands for Base Fee, t stands for block height, T stands for block size, the target block load is T/2, and g stands for the number of transactions contained in the block. Since g depends on the basic fee b, we will gt | bt represents the number of transactions included in Bt when the basic fee is equal to bt. D is the adjustment factor, and the current setting is d=0.125.
However, the above formula design will bring an interesting mathematical phenomenon: suppose there are now four blocks, the first block is used at 50%, the second block is used at 0%, and the third block is used The rate is 100%. Assuming that the initial Base Fee is 1, what is the Base Fee of the fourth block? The details are shown in Table 1.
It can be seen from the table that although the average usage rate of the first three blocks is 50%, under the adjustment of the algorithm, the Base Fee of the fourth block is 63/64 instead of 1. So in a volatile state, what is the equilibrium condition to keep the Base Fee constant? Roughly, this requires that the ratio of full blocks to empty blocks is -ln(7/8)/ln(9/8)=1.134, that is, the ratio of full blocks to all blocks is 53.13%, and empty blocks to all blocks The ratio is 46.87%, or the average utilization rate of each block is 53.13%, that is, the average gas consumption of each block will increase by about 6%.
Of course, the above estimates are only rough calculations. From the actual data on the chain, after the London fork, the average gas consumption per block rose to 15.5 million, that is, the average block utilization rate was 51.7%, and the actual increase rate was 3.3%.
The above is the main reason for the increase in block capacity after EIP-1559 upgrade. It should be noted that this is not the only reason for the increase in the average daily gas consumption of Ethereum. At present, some data studies have found that the London upgrade has delayed the arrival of the ice age and shortened the block generation time, which is also an important reason.
It should be emphasized that EIP-1559 cannot fundamentally solve the current situation of Ethereum network congestion. After all, EIP-1559 only expands each block by 3%. The fundamental measure to solve the congestion problem lies in the expansion plan of Ethereum Layer 2, sharding technology and so on.
On-chain data 3: EIP-1559 did not cause deflation, but successfully slowed down inflation
Another focus of EIP-1559 that has attracted the attention of the market is that the destruction of Base Fee may bring deflationary effects to Ethereum. However, from the actual data, EIP-1559 did not cause deflation of Ethereum, but successfully reduced its inflation, making the actual circulation of ETH significantly slower than before the “London Upgrade”.
There are three main sources of supply for Ethereum: one is Block Rewards, which currently provides 2 ETH rewards per block; the other is Uncle Rewards; the third is to include uncle blocks in confirmed Uncle Incl Rewards in the block. At present, the daily output of ETH including these three parts is about 13000-13500 ETH, while the amount of ETH burned by EIP-1559 is only about 5000 ETH per day. Therefore, at least from the current data, EIP-1559 has not been able to cause deflation of Ethereum.
On-chain data 4: Miners’ income has not yet seen a significant decline
Before the London upgrade, many people predicted that EIP-1559 would reduce the income of miners. However, what is striking is that from the data on the chain, when priced in U.S. dollars or USDT, the income of miners has increased significantly after the upgrade in London due to the impact of the rise in the price of ETH; but even if the factors affecting the price of ETH are removed, In terms of ETH, the income (or handling fee) of miners has only declined slightly, and the income has not dropped significantly.
However, new questions have arisen. Why is there only a “slight” decline in revenue here? After all, the Base Fee, which accounts for most of the handling fee, has been destroyed. In theory, the handling fee will drop significantly before it is reasonable.
From the analysis of the income composition of Ethereum miners, it can be seen that after the upgrade in London, most of the fees are still paid in the original mode. This is also the reason why miners’ income has only declined “slightly” even when priced in ETH.
EtherScan data can further confirm the above reasons: after the EIP-1559 upgrade, transactions in each block retain three modes, one is the familiar EIP-1559 mode, and the other is the Access List mode, which is the main source of the transaction mode. In EIP-2930, it is mainly to solve the main network transaction blocked by EIP-292; the third is the original transaction (Legacy) mode.
Refer to “1559 Cheatsheet for Implementers”, the original transaction mode here is not the original first price auction mode, but the gas price is interpreted as maxFeePerGas, baseFeePERgas and maxPriorityFeePerGas, where maxFeePerGas represents the maximum amount the user is willing to pay, and baseFeePerGas will be Destroyed, and maxPriorityFeePerGas is owned by the miner. For example, assuming that the Base Fee is 100 gwei:
- EIP-1559 Transaction Mode: The user sends a transaction with a GAS Price of 250gwei and a TIP of 5gwei. The user will pay 100+5=105 gwei, of which 100 gwei will be burned, 5 gwei will go to the miner, and the remaining 145 gwei will be returned to the user.
- Legacy mode: the user sends a transaction with a GAS Price of 250 gwei, at this time maxPriorityFeePerGas will be sent out with 250 gwei, 100 gwei will be burned, and 250-100=150 gwei will go to the miner
From the data of EtherScan, more than 80% of the transactions in the current block are generated in the original transaction (Legacy) mode, while the EIP-1559 transaction mode only accounts for about 20%. This is the main reason why miners’ fee income has only dropped “slightly”.
