What is the impact of Ethereum’s EIP 1559?

It has been about two months now since the Ethereum hard fork –EIP 1559 – was implemented. This is a very brief time in which to evaluate its effects, but Edward Oosterbaan, in an opinion piece for Coindesk, believes we might already be able to see some of the positives it is bringing, especially the upgrade’s base fee burn.

Ethereum uses block rewards to incentivize miners and validators of the chain under both proof-of-work (PoW) and proof-of-stake (PoS). Bitcoin uses a similar model, except that every four years it decreases the amount paid to miners, “until the reward is extremely negligible and the bitcoin supply tops at 21 million.” Once they reach this point, miners will have to rely on transaction fees for income. This means the network will need to sustain a high level of activity in order to pay miners for their services.

With EIP 1559 Ethereum has taken an action that is the opposite of Bitcoin’s. EIP 1559 took away the vast majority of transaction fee revenue that miners previously received, but Ethereum will continue to emit block rewards to miners (and eventually validators), indefinitely. And, whilst Ethereum has an uncapped supply, the new fee burn system will counteract ETH inflation.

As we know, Bitcoin has become seen as a hedge against inflation, but if it is seen primarily as a store of value, will there be enough in transaction fees to keep miners interested in the network?

This is a difficult question to answer, because Bitcoin’s fixed supply is what makes investing in the asset so attractive. By contrast, as Oosterbaan points out, “Ethereum’s supply will be extremely dependent on network activity and the demand for blockspace.”

As he says, his comparison of the two is entirely based on how they approach miner incentives, something which EIP 1559 addresses, and he believes that if Ethereum can continue to subsidize validators without diluting those that hold ETH then it will be very promising for the network.

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