Thread by @CroissantEth

I have seen a countless number of people underestimating the effects of EIP-1559 and it’s changes to the network

However, I am here to argue that it has the ability to fundamentally transform the view of $ETH as an asset class

Let’s take a deeper look… 🥐

In order to fully understand how EIP-1559 works, we have to first take a brief look at the current tx fee model today

Transactions work in what is known as a “first price auction.”

Because $ETH miners are scanning the network for the most profitable transactions…

it is usually the highest bidder (i.e a high volume trader on a DEX) who gets their transaction included in the block

Whenever a highly anticipated token or #NFT releases, this problem becomes magnified leaving many users out of the next block because of the sudden gas fee spike

Then combine this with wallets like MetaMask, that allow users to manually set their own gas price, and you’ll start to see that thousands of traders are bidding up the gas prices arbitrarily high against one another

But this is where EIP-1559 comes in…

It introduces the “base fee,” a variable fee which is set by the protocol, that changes based on network congestion on a block by block basis

Base fee:

-is burnt forever so miners can’t collude
-allows wallets to have the base fee automatically set
-fluctuates smoothly

The second thing introduced in EIP-1559 is the “miner tip,” which can be used to tip miners and help incentivize them to prioritize your transactions

Miner tip:

-optional
-goes directly to miner

This will be especially useful for arbitrageurs or high volume traders on a DEX

The last big change proposed in EIP-1559 is an increase in the max gas limit

If a miner sees that there was 100% utilization in the previous block, they will produce a block with the max gas limit in order to include more transactions, while driving up base fees in the process

This essentially creates a positive feedback mechanism between the gas fees on the network, and the utilization of the network

LEARN MORE:

Lastly,

A lesser-known effect of EIP-1559 is the establishment of $ETH as the ultimate currency on the network

Right now miners can include txs in blocks accepting 3rd party payment in $DAI

However, with EIP-1559 the base fee is set automatically, & it requires payment in $ETH

What I’ve explained so far in this thread will be some extraordinary changes to current user experience issues and the fundamentals for $ETH

Because EIP-1559 may actually be able to turn $ETH into a completely deflationary asset 🔥

Almost immediately after EIP-1559 goes into effect it will have an instant shock to ETH, & potentially even be burning the already existing tokens on the network 👀

It is important to understand that there is a significant difference between the supply of something & it’s flow.

Combine all of these factors with the merge to Proof of Stake, tx fees going to validators, $ETH being locked to stake, the record 23%+ of $ETH locked in smart contracts, the three year low exchange balances, and I think you’ll start to see why I’m so bullish with EIP-1559

Like I’ve said before…

You don’t “price in” an immediate supply shock to $ETH with fluctuating burns acting as a dividend for all of the users, while simultaneously making transaction fees significantly easier and potentially even much faster on the entire network…

Enjoy! 🥐

Few.