EIP-1559: Ethereum Major Upgrade and Its Impact Analysis

EIP-1559 is one of the most highly anticipated upgrades in Ethereum's history. This proposal fundamentally changes the way users participate in transaction bidding, and it will have a profound impact on aspects such as the future value capture of ETH, user experience, and security. Although this proposal has generated significant division within the Ethereum community, the opposition mainly comes from the miner group.

In this regard, a cryptocurrency researcher analyzed five possible scenarios and believed that the best strategy for miners is to support the deployment of EIP-1559. Currently, this proposal has received overwhelming support within the community, is technically ready, and can be incorporated into Ethereum after the Berlin hard fork, awaiting the final assessment from core developers.

After weighing the feasibility of various options and opportunity costs, we found that any form of radical protest would harm miners' long-term profits more than collaborating with users.

Sources of Miners' Income and Structural Bullish Outlook on ETH

Currently, miners' income mainly comes from three aspects:

1. A block subsidy of 2 ETH per block, as well as additional rewards for uncle blocks;
2. The bidding fee paid by users to include transactions in the block space;
3. Hard to quantify but highly valuable miners can extract value ( MEV ). Currently, most miners outsource this portion of income to arbitrage bots.

After the activation of EIP-1559, the income that miners gain from block subsidies and MEV remains the same as before. As long as the system is not congested, the included fees will be burned. When demand exceeds the maximum gas fee limit, both parties in the transaction will engage in additional price bidding, and the final bidding fees will belong to the miners.

To obtain these rewards, miners must invest in mining hardware, power purchase agreements, and other capital expenditures. These investments structurally make them bullish on ETH and the Ethereum economy, as only continuous mining can yield returns.

Users are the main body of the Ethereum economy

It is worth noting that all three sources of income for miners stem from users and the applications and businesses that serve them. The demand for ETH from users drives miners to sell it in exchange for fiat currency and other ecosystem tokens. Users' transfer, trading, and borrowing demands create congestion fees. The use of DeFi applications generates MEV in the form of price arbitrage and other opportunities for miners.

Users make up the economy of Ethereum, while miners provide services to them in the form of network security. This is a transactional relationship where miners offer services to gain economic incentives from users. Users have no moral obligation to pay miners more than the costs required for Ethereum's security, and similarly, miners have no moral obligation to continue mining if it is not profitable.

Analysis of Five Possible Scenarios

Scene 1: Miners remain on the old chain and do not upgrade to EIP-1559.

In many other blockchains, upgrades often face tough struggles. This is because users have lower costs if they choose to stay on the existing blockchain, so new proposals face significant resistance.

However, due to the existence of the difficulty bomb, this situation is unlikely to occur in Ethereum. Without a hard fork to reset the difficulty bomb, mining difficulty will continue to increase until the Ethereum network comes to a standstill. This makes it unfeasible to stay on the old chain, and any party opposed to EIP-1559 will incur the same cost to carry out a hard fork, at least to dismantle the difficulty bomb.

Scenario 2: Miners create competitive tokens and replicate Ethereum state

A more viable suggestion is that miners simply fork Ethereum and create their own tokens, similar to how ETC forked from ETH or BCH forked from Bitcoin. Whether forking makes sense depends on the opportunity cost of doing so. Miners must choose between mining a new competitive chain and maintaining the existing Ethereum chain.

In order to pay miners, the blockchain first needs to create value for users to obtain valuable block subsidies, congestion fees, and MEV. Bitcoin and Ethereum have been forked dozens or even hundreds of times, but most forks have never gained user favor. Therefore, the opportunity cost is very high.

Considering the complexity of the Ethereum state, which not only includes the issuance of ETH but also involves thousands of different tokens, smart contracts, and applications. Although these can also be replicated through forks, they are merely shells on another chain. Forks cannot truly replicate these assets, and these tokens will continue to operate on the EIP-1559 Ethereum blockchain, while being worthless on the forked chain.

As a result, DeFi applications that rely on collateral on the forked chain have also lost their meaning, such as collateral-backed stablecoin DAI or any form of AMM pool. Other factors outside of ETH, including important off-chain infrastructure like Oracles, liquidation bots, etc., will collapse, causing great chaos on the forked chain.

Although the successful fork of ETC from ETH in 2016 was a significant event, it is now unlikely that a similar occurrence will happen. The emergence of tokenized assets and DeFi has made the state of Ethereum difficult to fork.

Scene Three: Miners create competitive coins with new states

If the state of Ethereum cannot be forked, then what about the competing coins that simply copy the ETH distribution and other security elements and start from a brand new state?

This is more feasible than scenario two. Other "stateless" forks of Ethereum, such as Tron and the recent Binance Smart Chain ( BSC ), have proven this point. The success of the latter, in particular, highlights the enormous value of leveraging the Ethereum Virtual Machine ( EVM ), existing wallet infrastructure ( like Metamask ), and developer tools. Furthermore, although dapps do not automatically replicate, their deployment is relatively simple, allowing for the issuance of new assets afterwards.

Given the rapid success of BSC, is there a demand in the market for a "permissionless" version that uses PoW mining rather than centralized operators? A new blockchain could even raise the gas limit to attract users who are currently unable to use Ethereum due to high gas prices.

However, further reflection reveals that this approach also has problems, mainly surrounding supply distribution.

If the new chain decides to reset the supply distribution of ETH and start from zero, it will lose the existing advantages of supply distribution. Guiding a new supply distribution will require years of high inflation, which will decrease the attractiveness of the asset. In contrast, BSC does not have this issue, as its unique block producers do not require additional mining incentives.

But if the new chain replicates the distribution of ETH, then a large amount of new ETH will fall into the hands of potentially hostile users, who may use these coins for a long time to suppress prices. This will make the block rewards for miners on the new chain worthless, indicating that even a "stateless" fork requires a certain level of support from existing users.

Scenario 4: Miners join the new chain but prevent EIP-1559

As mentioned earlier, any attempt to create a competing coin is essentially doomed to fail. This leaves another possibility, which is currently the most discussed option among miners: miners join a new blockchain together with users, but suppress the burning of ETH by controlling the basefee to 0 under the EIP-1559 mechanism.

The method works as follows: The EIP-1559 controller determines the next block's basefee by observing the size of the previous block. If the previous block exceeds 50% of the target gas limit ( of the maximum gas limit ), the basefee will increase to limit transaction demand. If it is below the target gas limit, the basefee will decrease to stimulate demand.

Miners can theoretically control the number of transactions included, thereby controlling the block size and consequently the base fee. If miners only mine blocks that are less than half full, the base fee will never exceed zero, and therefore no fees will be burned. However, competition among miners makes this strategy difficult to implement in practice.

Assuming a mining pool with 5% of the hash power tries to implement this strategy, only mining half-full or smaller blocks ( even if the demand far exceeds this level ). Meanwhile, the other 95% of the hash power will mine larger blocks, gaining more revenue from fees, and the base fee will rise regardless. The mining pool controlling 5% of the hash power will soon realize they are incurring losses, either choosing to give up or losing hash power. This indicates that as long as there is competition, self-interested miners will tend to include as many transactions as possible.

What would happen if competition decreases? Suppose 60% of miners agree to implement this strategy. The result remains the same because for every half-full block mined by the 60% of alliance miners, the remaining 40% of miners will mine full blocks and receive all additional income from congestion fees and MEV. Therefore, the base fee will still increase over time, and we refer to this situation as an unstable alliance.

The strategy only works when hostile miners are able to eliminate competition, making it impossible for others to mine large blocks. After having 60% of the hash power, they can achieve this by implementing a so-called miner activation soft fork (MASF). This MASF will stipulate that blocks exceeding a half-full state are invalid, so 60% of the miners should ignore them. At this point, 40% of the miners can technically still mine larger blocks, but the 60% will refuse to continue mining on these blocks, causing all transactions and block rewards allocated to the minority to be wasted.

It is important to understand that MASF is not a new concept. Nowadays, miners can form such alliances, for example, by limiting gas limits to increase fees, charging higher fees from large transactions, or setting price floors. These strategies may initially seem more profitable, but miners have good reasons not to try.

First, they need cooperation from many mutually distrustful parties, which is difficult to achieve. More importantly, MASF will be an unprecedented attack on the Ethereum network and its users. This will not only undermine network stability at the consensus level but also damage users' trust in Ethereum. This has already threatened future mining revenues, but users may also become more active in opposing this censorship. For example, users may start broadcasting transactions directly to friendly mining pools to deduct fees and MEV from the censored pools.

In summary, for miners who have not implemented MASF, basefee manipulation is not a stable equilibrium. However, if miners truly implement MASF, it would be an unprecedented self-destructive attack on Ethereum, of course including their own investments.

Scenario Five: Miners join the new chain, successfully implementing EIP-1559

Considering that the results of scenarios 1-4 are unfavorable for miners, we are confident that their main option is to collaborate with users.

Even if miners' income on this new chain decreases, ( is not necessarily the case, it is still much more than what can be earned by trying to create a competing coin. The value of any such competing coin relative to ETH will be close to zero, it will not generate transaction fees due to congestion, nor will it generate MEV from DeFi arbitrage opportunities.

Furthermore, implementing MASF to suppress the base fee would be an unprecedented blatant attack on Ethereum and its users. We have never seen such an attack in reality, and there are good reasons for that. It could undermine user confidence and the value of ETH, as well as economic activities within the system, thereby directly harming the interests of miners.

Possible Concessions

In addition to the five scenarios mentioned above, we also discussed the different concessions that users might make to appease miners, which mainly include:

• Increase the block subsidy of the new chain to compensate miners for losses incurred due to the burning of basefee.
• Change the Ethereum PoW algorithm to exclude ASIC miners from the network.
• Distribute the base fee to the miners of the next N blocks, instead of burning it.

However, we reiterate that collaborating with users for upgrades is already in the best interest of miners. Therefore, users do not need to meet the demands of miners, nor do they need to make any further concessions to them.