Viewpoint: The Ethereum Mining Union accepted the EIP-1559 proposal. Why?

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The reason is simple. Compared with protesting against the long-term loss of their own income caused by the upgrade of EIP-1559, miners are better off cooperating with users to promote its implementation.

Written by: Hasu and Georgios Konstantopoulos
Compiler: Perry Wang

EIP-1559 is one of the most anticipated improvement proposals in the history of Ethereum. It will drastically change the user’s trading bidding mode and bring other major benefits .

EIP-1559 has won overwhelming support in the Ethereum community and is technically ready to be included in the London hard fork, only waiting for the normal core developer evaluation process. Recently, miners have begun to oppose this proposal. This is not surprising, because this mechanism will burn some of the transaction fees previously received by miners.

Perhaps the following statement is counter-intuitive, but we believe that the best strategy for miners is to support the deployment of EIP-1559.

We reviewed the two most effective methods for miners to protest the proposal and tested the above hypothesis. The two methods are:

  1. Fork Ethereum and create an alternative currency without EIP-15559 upgrade;
  2. Suppress basefee to zero to prevent Ethereum from adopting EIP-1559 upgrade.
  3. After considering the feasibility and opportunity cost, we found that the long-term loss of their own income caused by any of the above-mentioned positive protests by miners exceeds that of cooperation with users to promote the EIP-1559 upgrade.

Miners are structurally long ETH and the Ethereum economy

The EIP-1559 upgrade will affect the income of miners, and the income of miners currently mainly includes three sources:

  • First of all, every time a block is mined, a subsidy of 2 ETH will be obtained, and the uncle block will also bring additional rewards.
  • Second, the cost from users bidding to enter the block space (which has nothing to do with the final status of the transaction in the block).
  • Third, miners that are difficult to quantify but have high value can withdraw MEV, which can be extracted by inserting (or not inserting) transactions at specific points in the block. Most miners are currently “outsourcing” it to preemptive trading and arbitrage trading robots, which conduct auctions in the Ethereum memory pool Mempool.

After activating EIP-1559, miners will continue to receive the same income from block subsidies and MEV. As long as the Ethereum system is not congested (the demand is lower than the block gas limit), the fees included in the transaction will be burned. When the demand exceeds the block Gas upper limit, the first price auction between traders needs to be increased, and the proceeds belong to the miners.

In order to receive these rewards, miners must invest in mining hardware, power purchase agreements and other capital expenditures. This investment means that Ethereum miners are structurally longing Ethereum and the Ethereum economy, because they have to mine to fill their investment.

Although we do not deny that EIP-1559 may indeed reduce one of the above three types of income, protecting Ethereum and its users still share the same benefits with the considerable future income of miners. Even if all basefees are burned, MEV and block subsidies will still be an important source of income for miners. Finally, this upgrade may also mark a turning point in users’ demand for Ethereum, and will ultimately promote the development of the entire Ethereum economy.

The user is king in the Ethereum economy

To understand the development momentum of Ethereum, it is important to understand that all three types of revenue come from users and the applications and enterprises that serve them.

Users create demand for ETH, and then miners sell ETH to them in exchange for fiat currency and other tokens in the Ethereum ecosystem. The user’s demand for transactions, exchanges, borrowing, and loans for these tokens has generated congestion charges. Finally, users use decentralized financial DeFi applications, such as decentralized exchanges, to create MEV in the form of functional price arbitrage and other opportunities.

The user is the Ethereum economy. Miners provide services to them in the form of network security. This is a transactional relationship-miners will not provide this service wholeheartedly, but in response to the economic incentives created by users.

The user is king in the Ethereum economy. Miners provide services to users in a way that guarantees network security. This is a transactional relationship-if miners provide this service not from kindness, but for the economic incentives created by users.

Users have no moral (or other) obligation to pay miners more than the security of Ethereum, and miners have no moral (or other) obligation to continue mining when it is unprofitable.

In the final analysis, the development momentum between users and miners can be explained by interchangeability. Ethereum users are currently the main source of income for miners, and it is almost impossible for miners to replace this status quo. But users are likely to replace some or even most of the current Ethereum miners.

After building this basic relationship between miners and users, we can imagine how this framework will work in various scenarios after the EIP-1559 improvement proposal is activated.

Scenario 1: Miners maintain the old chain without EIP-1559

We envision this scenario simply because no possibility can be missed, because in many other blockchains, upgrading faces inherently daunting challenges. Since users do nothing and stay on the existing chain, the cost is usually lower and it is easier to prevent new proposals from being passed.

Due to the difficulty bomb, this scenario will not happen in Ethereum. In short, if there is no hard fork to reset the difficulty bomb, the mining difficulty will continue to increase until Ethereum itself stagnates. Therefore, it is impossible for miners to stay on the old chain. Any plan to abandon the EIP-1559 upgrade and find another way will need to spend the same cost to carry out a hard fork that can at least defuse the difficulty bomb.

Scenario 2: Miners create altcoins that include the state of Ethereum

For miners, a more feasible proposal is to simply fork Ethereum and create their own alternative currency, similar to the fork of Ethereum Classic ETC from Ethereum or the fork of BCH from Bitcoin. Whether the fork is reasonable depends on the opportunity cost of doing so. Regarding the EIP-1559 upgrade, Ethereum miners must choose between mining a new altcoin blockchain and the existing Ethereum blockchain.

Opportunity cost is not a joke, but it is real money, because in order for miners to get any income, the blockchain first needs to create value for users in order to provide valuable block subsidies, congestion charges and MEV. Both Bitcoin and Ethereum have been forked dozens of times (or even hundreds of times), but the vast majority of these forks have never been favored by users.

If the state of the blockchain can be forked, it will be much easier to build attractiveness. All successful forks in the past have done this. In the case of Bitcoin, the state is just a list of token ownership. BCH forked this list and used Bitcoin’s existing supply distribution to airdrop new BCH tokens to all BTC holders.

But the state of Ethereum is more complicated, not only including the distribution of ETH, but also thousands of different tokens, smart contracts, applications, etc. These also need to be copied to the hard-forked blockchain, but they have a shape but no substance on another chain.

For example, many of the extremely large-scale tokens on Ethereum, such as stablecoins or WBTC, are claims on real-world assets. Claims can be copied, but assets will not be copied. These debt tokens will continue to run on the Ethereum blockchain after the EIP-1559 upgrade, and will be worthless on the fork chain.

As a result, other DeFi applications that rely on collateral on the fork chain will also be disintegrated, such as the collateral-backed stable currency DAI or any form of AMM fund pool. In short, everything except ETH, including important off-chain infrastructure, such as oracles, liquidation bots, etc., will collapse and cause huge chaos on the fork chain.

Although ETC was able to successfully fork from Ethereum in 2016, similar events are no longer possible today. The emergence of tokenized assets and DeFi has made the state of Ethereum unforkable.

Scenario 3: The miner creates a new alternative currency with a new state

If the state of Ethereum cannot be forked, what about copying only the security elements of the state of Ethereum (such as the distribution of ETH), or even launching a completely new alternative currency from a completely fresh state?

This is more feasible than option 2), as demonstrated by other “stateless” branches of Ethereum (such as Tron and the recent Binance Smart Chain BSC). In particular, the success of BSC proves that the use of Ethereum’s virtual machine EVM, existing wallet infrastructure (such as Metamask) and developer tools, bred great value. In addition, although decentralized application DApps will not be copied automatically, these DApps can be easily deployed and filled with new assets later.

Given the rapid success of BSC, will there be a demand for an “unlicensed” version of Ethereum in the market? Proof-of-work PoW mining is used instead of centralized node operators. This new chain can even increase the Gas limit to target users who currently cannot use Ethereum due to the high gas price.

But after further thinking, you will find that this scheme is also problematic, mainly around the distribution of token supply.

If this new fork chain decides to reset the supply allocation of ETH and start from 0, it will lose the existing supply allocation. It takes years of high inflation to guide new supply allocation, making holding the asset less attractive. In contrast, BSC does not have this problem, because Binance is the only block producer BP and does not require additional mining incentives.

But if the new forked chain replicates the distribution status of ETH, many new alternatives on the new forked chain will flow into the hands of potential hostile users, who may use it for a long time to suppress prices. This will make the block rewards obtained by the miners on the new fork chain become worthless, indicating that even a “stateless” fork requires some support from existing users.

Scenario 4: Miners join the new Ethereum chain, but block the upgrade of EIP-1559 in the new chain

As we have already stated, any attempt to create an alternative currency is basically doomed to failure. This leaves another possibility, the one most discussed by miners. In this scenario, miners will migrate to the new Ethereum blockchain together with users, but then control the basefee to zero to prevent the EIP-1559 mechanism from burning any ETH.

This method works as follows: The EIP-1559 controller determines the basefee of the next block by observing the size of the previous block. If the previous block exceeds the target gas limit (50% of the gas limit), the basefee will be increased to suppress transaction demand. If it is less than the target Gas limit, the basefee will be reduced to stimulate demand.

Miners can technically control how many transactions are included in the block, so they can control the block size and thus the basefee. If they only mine blocks that take up less than half of the capacity, then the basefee will never increase above zero, so no fees will be burned. However, the competitive relationship between different miners makes this strategy impossible in practice.

First, suppose a single mining pool with 5% hash power tries to adopt this strategy. They only mine blocks that occupy more than half of the capacity, even if the demand far exceeds that level. At the same time, the other 95% of the hash power will dig larger blocks and get more income from transaction fees, but the basefee will increase. A 5% mining pool will soon realize that it is completely wasting money, giving up or losing all its hash power. This shows that as long as selfish miners compete with each other, they will want to include as many transactions as possible in the mined blocks.

And if the competition is not so fierce, what might happen? Imagine that instead of 5% hashrate, miners with 60% hashrate agree to implement the strategy. The result is still the same, because every time a cartel mine composed of 60% of the mining power digs a block that takes up half of the capacity, the other 40% of the calculation power will dig a block with full capacity, and the congestion fee and With all the extra income earned in MEV, the basefee will still increase over time. We call it an unstable alliance.

This strategy will only work if rival miners can find a way to eliminate competition, when no one will dig up a full block. With 60% of the hash power, they can achieve it by implementing a so-called miner activated soft fork (MASF). This MASF will rule that more than half of the blocks are now invalid, so 60% of the miners should simply ignore them. Now technically speaking, 40% of the computing power can still mine blocks with full capacity, but 60% of the parties will refuse to build on blocks with full capacity. Therefore, a minority of all transactions and zones allocated by cartels Block rewards will disappear.

You must understand that MASF is nothing new. Miners can already form such cartels today, for example by limiting gas limits to push up fees, charging higher fees from larger transactions, or setting price floors. All of these strategies seemed profitable at first, but there are good reasons why the miners did not try to implement them.

First of all, this requires mutual mistrust of parties to cooperate with each other, which is difficult to achieve. But more importantly, MASF will be an unprecedented attack on the Ethereum network and its users. This will not only undermine the stability of the network at the consensus level, but also undermine the trust of users in Ethereum. This has threatened the future income of miners, but users may also be more active against censors. For example, users are expected to start broadcasting transactions directly to a friendly mining pool in order to refuse to leave fees and MEV to the review pool.

In short, for miners, basefee manipulation without MASF is not a stable balance. But if the miners do implement MASF, it will cause an unprecedented self-destruct attack on Ethereum and its own investment.

Scenario 5: Miners join the new Ethereum chain and successfully implement the EIP-1559 upgrade

Given that the results of miners in Scenarios 1 to 4 are not satisfactory, we believe that their main choice is to cooperate with users.

Even if the miners make less money on the new Ethereum chain (not necessarily), it is still much more than the money made by trying to create an alternative currency. Compared with ETH, any such alternative currency has a value close to zero, and will not generate transaction fees due to congestion, nor will it generate MEV due to DeFi arbitrage opportunities.

In addition, the implementation of MASF to suppress basefee will be an unprecedented transparent attack on Ethereum and its users. We have never seen such an attack, and there are good reasons. This may undermine user confidence, the value of ETH, and the economic activities that occur in the system, so it is directly against the vital interests of miners.

Possible concessions

In addition to the five scenarios discussed above, we also discussed the different concessions that users may make to appease miners. mainly:

  1. Increasing the block subsidy of the new Ethereum chain will burn the basefee to compensate the miners.
  2. EIP-969 improvement proposal: change Ethereum’s PoW algorithm to remove ASIC miners from the network.
  3. Do not burn the basefee, but distribute it to the miners in the next N blocks.
    However, we once again emphasize that it is in the best interests of miners to cooperate with users to upgrade. Therefore, users do not need to meet the needs of miners, nor do they need to make any concessions.

in conclusion

This is why we expect the EIP1559 improvement proposal will become a reality, and we are quite confident in this analysis. We look forward to discussing these topics with the community at the upcoming EIP1559 upgrade roundtable (February 26, 2021, 2200 Beijing time).

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