Ethereum Miners Are Likely to Accept EIP-1559 Activation - Analysts
The vast majority of Ethereum miners are unlikely to protest EIP-1559, a proposed change to Ethereum’s ‘crazy high’ fee market that would potentially cut a fair share of miners’ revenue, according to popular crypto analyst Hasu and Georgios Konstantopoulos, Research Partner at Paradigm, a cryptoasset investment firm.
EIP-1559 is an Ethereum improvement proposal by ETH co-founder Vitalik Buterin that was first proposed in April 2019. It is supposed to change the rules of how Ethereum users bid for block space in order to get their transactions confirmed. It comes with a new set of rules that are relatively simple but would mean significant changes for users, miners, wallet providers, as well as the overall security of the Ethereum blockchain.
Four main improvements proposed by EIP-1559, as outlined in the Analysis of EIP-1559, are:
- All transactions pay the same fee rate. One of the biggest problems with first-price auctions currently used by Bitcoin and Ethereum is fee estimation. EIP-1559 seeks to improve it by making all transactions pay the same rate as much as possible instead of making individual bids, which would hopefully lead to lower fees and more precise fee estimation.
- Block size slack mechanism. Demand for block space often varies, making miners validate both half-full and highly congested blocks. EIP-1559 slack mechanism would allow some blocks to be larger while other blocks would be smaller. As such, the longer-term average blocksize limit would still be enforced, even though there would be short-term variation between individual blocks.
- Security improvements. EIP-1559 seeks to make the Ethereum blockchain security less reliant on user transaction fees by burning them and instead incentivizing miners with a more reliable perpetual block subsidy.
- Preventing economic abstraction. EIP-1559 will also enforce that transactions burn a specific amount of ETH so that other tokens don’t threaten the reserve status and monetary premium of the native token.
As reported, some miners are unhappy with the proposed changes and have started rallying against the proposal under the hashtag #StopEIP1559.
One of the leading mining pools opposing the proposal, Flexpool, has even launched a website to keep track of Ethereum mining pools that stand against the proposal. According to some of the pool’s latest tweets, their faction stands against burning transaction fees instead of giving them to ‘’honest miners who invested their savings into the Ethereum security.’’
Even so, the article co-authored by Hasu and Konstantopoulos, and published on the Deribit Insights' website, argues that most miners are likely to activate the proposal because they are structurally long ETH and the entire Ethereum economy, and they are likely to continue receiving the same revenue from block subsidies. In addition, the report authors stressed that miners provide service to Ethereum users in a transactional relationship, so without a sufficient number of users, there would not be sufficient revenue for miners.
“Users have no moral (or other) obligation to pay miners more than is needed for Ethereum to be secure any more than miners have a moral (or other) obligation to keep mining when it’s not profitable for them.”
Having this dynamic in mind, the report specifies five scenarios of how the EIP-1559 activation may play out.
Miners maintain the old chain without EIP-1559. This scenario is unlikely because of the Ethereum difficulty bomb. All EIP-1559 opponents would have to go through an additional hard fork to avoid grinding their version of Ethereum to a halt.
Miners create a new altcoin. Much like with Ethereum and Ethereum Classic (ETC) split, miners could fork Ethereum and create an entirely new chain. However, this is unlikely as well because a forked version of Ethereum today would also replicate thousands of different tokens smart contracts, applications, and much more. Even though all of the projects would be copied in a fork, they would essentially constitute mere skeletons. Consider a stablecoin project or Wrapped Bitcoin (WBTC) - they represent claims on an asset in the real world, yet duplicating the claim would not duplicate the asset.
“The emergence of tokenized assets and Defi has made Ethereum’s state unforkable,’’ according to the authors.
Miners create an altcoin with a fresh state. Creating a new altcoin with a fresh state is more feasible than the second scenario, but the new chain would lose the existing ETH supply distribution, as it was the case with other stateless forks of Ethereum like Tron (TRX) or Binance Smart Chain (BNB). Alternatively, if the new chain copied the distribution of ETH, all the new coins would be in the hands of potential adversaries who could use it to suppress the price discovery of the new asset.
Miners could join the new chain but block EIP-1559. In this scenario, miners would join the users on the new Ethereum blockchain, but would actively interfere with the EIP-1559 mechanism to prevent it from burning ETH. However, competition between different miners makes this strategy infeasible without the implementation of an additional miner-activated soft fork, which would constitute an unprecedented and self-destructive economic attack on the Ethereum network and its users.
Miners join the new chain and support EIP-1559. According to the researchers, this is the most likely scenario. Even if miners made less on the new chain, they could still earn much more than creating any sort of altcoin.
In addition to these scenarios, the report also mentions three possible concessions that could satisfy the miners even more:
- Raising the block subsidy on the new chain to increase miner compensation.
- EIP-969 activation, which would remove all ASIC miners from the Ethereum network.
- Instead of burning the fees, it could be distributed to miners in the next unspecified number of blocks.
Nevertheless, the report concluded that “it is already in the best interests of miners to cooperate with users on the upgrade,’ and the transition is likely to succeed despite the protests of some.
The upcoming EIP-1559 transition will be further discussed at the EIP-1559 roundtable on Friday, February 26, 2021, at 14:00 UTC.
At the time of writing (17:12 UTC), ETH trades at USD 1,562 and is down by almost 10% in a day and 12% in a week, trimming its monthly gains to less than 27%. The price rallied by almost 500% in a year.
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