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EIP-1559 is an improvement proposal proposed by Ethereum Community to solve the congestion problem of ETH. Users need to pay a fixed base fee every transaction, if a transaction needs to be expedited, users need to pay a tips to miners. The tips goes to the miners, and the base fee is burned. This proposal solves the problem of the high gas fee, but also increased the ETH deflation.
EIP-1559 will change Ethereum’s fee market mechanism. Fundamentally, EIP-1559 gets rid of the first-price auction as the main gas fee calculation. In first-price auctions, people bid a set amount of money to pay for their transaction to be processed, and the highest bidder wins. With EIP-1559, there will be a discrete “base fee” for transactions to be included in the next block. For users or applications that want to prioritize their transaction, they can add a “tip,” which is called a “priority fee” to pay a miner for faster inclusion.
As an analogy to explain the base fee and tip, imagine the experience of using a ride sharing service app on your phone. You want to use this app to get a ride to go from A to B. The cost to go from A to B is the same, regardless of which driver picks you up (the base fee in EIP-1559). Now, imagine if you were able to add a tip to your driver, prior to getting on the ride. If your tip is higher than what other people at that time are offering, drivers will be incentivized to pick you up over other potential passengers not offering a tip.
This process is similar to your ETH transactions: you can set a tip for miners (the “driver” in the above example) to include your transaction in the next block (the “ride” in the above example). A higher tip means a greater chance of your transaction being included in the next block and therefore being completed.
As a side effect of a more predictable base fee, EIP-1559 may lead to some reduction in gas prices if we assume that fee predictability means users will overpay for gas less frequently. With EIP-1559, the base fee will increase and decrease by up to 12.5% after blocks are more than 50% full. For example, if a block is 100% full the base fee increases by 12.5%; if it is 50% full the base fee will be the same; if it is 0% full the base fee would decrease by 12.5%.
The ongoing movement of applications to rollups and Layer 2s will be what greatly reduce fees.
In the Gas fee calculation based on the first price auction, the miner receives the block award and the Gas fee, which means that all the Gas fee paid by the user exchange belongs to the miner. In EIP-1559, the basic fee is destroyed, but the tips and block awards still go to the miner. In the short term, the ETH income of miners will decrease. However, miners' earnings are not necessarily affected in the long run because the basic costs are destroyed, thereby deflating ETH and increasing its value to some extent.