Creator Of ETH Proposes 'BASEFEE' To Address Transaction Fee Challenges

March 8, 2021 03:00 PM
Ethereum Coin

Ethereum Coin




Bitcoin (BTC) rallied to as high as USD 51,800 over the weekend. UniSwap (UNI) has increased its market cap by roughly USD 5 billion since Friday, making the asset the 8th largest crypto by that metric.

Crypto Story of the Day

Ethereum (ETH) rallied this weekend, coinciding with the scheduling of Ethereum Improvement Proposal (EIP) 1559 for July 2021. The EIP alters the way transaction fees are paid on the network and is likely to insert further uncertainty into ETH’s technical roadmap at a moment when competing smart contract networks are achieving record valuations.

The solutions outlined in EIP 1559 were introduced by ETH’s creator Vitalik Buterin in 2018. On Friday, EIP 1559 was scheduled to be introduced alongside the London upgrade to ETH in July. 

EIP 1559 aims to address challenges of using the network that stem from transaction fees. Currently, ETH users must submit how much they’re willing to pay for their transaction to be processed by miners. Miners most often select transactions accompanied by the highest fees, which incentivizes users to select high fees to ensure timely processing of transactions. 

However, users may underestimate transaction fees, which often results in transaction delays. As such, the current process incentivizes high fees while also causing delays to users who misjudged costs. EIP 1559 aims to overcome this by introducing “BASEFEE,” a benchmark fee for transacting that’s dependent on demand for transacting. 

The increments by which BASEFEE changes are limited, and set by the network itself programmatically, giving users insight into possible fees. Users will be able to place a “tip” on top of BASEFEE in order to incentivize miners to process their transaction faster. Users who don’t have a reason for faster processing times can select a lower BASEFEE than the current one and their transaction will be processed once the metric falls to the desired level. 

With this system, only the tip goes to miners, while the ETH provided as BASEFEE is destroyed. 

Proponents of the EIP argue that the new mechanism will reduce fees and improve usability by giving users greater control over the speed at which transactions are processed, but also allowing users to place high tips in order to have their transactions processed faster. 

EIP 1559 will only apply to the proof-of-work ETH network. ETH miners have expressed concerns over the EIP and the degree of support for the measure within that community is unclear. Native tokens of DeFi venues, whose quality of life has been adversely affected by high transaction fees, also rallied over the weekend (UNI, AAVE). 

The appetite for a network offering similar concepts to ETH but with fewer throughput issues is exemplified by recent growth of Binance Coin (BNB) and Cardano (ADA), which have added USD 29 billion and 24 billion, respectively, to their valuations since the beginning of February. 

While EIP 1559 has been welcomed by some in the ETH community, we feel the upgrade highlights the network’s ongoing vulnerabilities at a precarious moment when competing tokens are seeing record market cap growth.   

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