Ethereum London Hard Fork: EIP-1559

The most important EIP(Ethereum Improvement Proposal ) in this fork was EIP-1559

EIP-1559 is responsible for changes in the Ethereum transaction pricing model. It has made it the most discussed EIP ( in general EIP get with developer community) in public space, as it has impacted everyone. Changing the transaction pricing model has changed what users pay to transact and what Ethereum miners are paid to mine.

Transaction Price Model Before EIP-1559:

It was based on a simple auction mechanism. The users used to send the transactions as biddings(gas prices) and miners choose transactions with the highest bids. The transactions that get included/mined pay gas*gasprice, it gets transferred to the miner. The miners used to choose transactions to be mined which was most profitable for them. Users use to put transactions with the gas price they are willing to pay, miner used to get transaction Fee (gas * gas price) for including the transactions in the block.

The block size had a hard limit of 15million gas.

The transaction structure used to look something like

??chain_id

signer_nonce

??gas_price

??gas_limit

??destination

??amount

??payload

??access_list

??signature_y_parity

??signature_r

??signature_s

With time various shortcomings got attributed to the above auction mechanism and hard limit on the block size.

* Increase in the transaction fee.

* Difficult to predict the gasprice.

* Unnecessary delay for users.

Transaction Price Model after EIP-1559:

EIP-1559 introduces the concept of the base fee and priority fee. The base fee is increased or decreased by the protocol based on how congested the network is. If the network exceeds the target gas usage limit, the base fee increases slightly and if is below the target capacity the base fee decreases slightly. The base fee gets burned does not go to the miner. The priority fee acts like the tip to the miner to include the transaction in the network

Now the transaction structure looks something like

??chain_id

??signer_nonce

??max_priority_fee_per_gas

??max_fee_per_gas

??gas_limit

??destination

??amount

??payload

??access_list

??signature_y_parity

??signature_r

??signature_s

You can see that gas_price has been removed and max_priority_fee_per_gas and max_fee_per_gas have been added. The user initiating the transaction is supposed to supply these two values ( he may skip max_fee_per_gas, as by default base rate will be deducted, max_fee_per_gas acts as an upper circuit bound).

Additionally, the 15 million hard gas limit has gone away, and the gas limit and base fee are now linked, allowing for blocks to become significantly larger and accommodate more transactions for short periods of time. Maintaining larger blocks for any duration rapidly becomes economically prohibitive.

Brining in a mechanism to burn the ether has brought in deflationary aspect in Ether.