EIP-1559: A “make it or break it” moment for Ethereum

Ari Paul, co-founder of BlockTower Capital, defended the implementation of EIP-1559, arguing that the proposal was less a demonstration of equity as an anti-inflationary mechanism. He defined the potential implementation of EIP-1559 as a "do or die" Ethereum moment. In a series of tweets, Paul showed that the rationale for supporting EIP-1559 was relatively simple: to allow Ethereum to grow by diversifying the investors who access the platform.

As reported by CNF, the EIP-1559 proposal contemplates a change in the fee mechanism used to validate transactions on the Ethereum (ETH) blockchain. The current model is known as “first price auction”. As in Bitcoin’s blockchain, in Ethereum the model works by paying a fee that encourages miners to validate a transaction, the higher the fee the faster it will be validated.

EIP 1559 would change the model to implement a base rate parameter to be charged by the protocol. According to the proposal, with each completed transaction the fees will be split. One part of the fee will go to the miner who will receive a sort of “tip” and the other part will be the “space fee” which will be burned. By removing the incentives to manipulate the fees, the model would be much more predictable.

Is the Ethereum EIP-1559 proposal irrelevant to PoS?

BlockTower Capital’s CIO argues that EIP-1559 will be relevant especially after the DeFi sector has established itself as a secure value platform. At that time, Ethereum will need to grow faster and will need to diversify the investors who enter the platform. At this point of “make it or break it”, Paul is leaning towards the optimistic side because of the change in narrative that will attract new investors. The current narrative is that cryptocurrencies are “digital gold”, but the new narrative that will be achieved with EIP-1559 is that ETH is a solid currency with an anti-inflationary policy:

Reducing supply as a function of usage is a simple and convincing narrative as to why all sorts of activity on the platform will long-term benefit investors in L1. That narrative will be necessary for the next order of magnitude of growth in diverse ethereum holders.

In addition to changing Ethereum’s monetary policy to make it anti-inflationary, EIP-1559 will increase the platform’s security. Paul believes that the upgrade to Ethereum 2.0 and the change in the consensus algorithm will bring greater incentives to attack the network. EIP-1559 will be important at that stage:

(…) growth is critical to security in a PoS chain. And imo (in my opinion), that growth (and ETH market cap) has to keep up with the growth in the market cap of tokens on ethereum or you incentivize a wide range of game theory attacks.

Ethereum’s co-creator, Vitalik Buterin, responded to Paul and disagreed that EIP-1559 will be a potential failure point for Ethereum. Buterin said that compared to the change to the Proof-of-Stake, EIP-1559 is “irrelevant” in terms of disinflation. This is because with PoS there would be no mining ETH emissions.

However, Messari researcher Ryan Watkins commented that the development of the Ethereum is progressing positively in technical and economic terms. Watkins agrees with Paul and said the future of ETH will be determined by EIP-1559 and the update to Ethereum 2.0.

It is possible that within a couple years, ETH may not only be the most useful asset in crypto given its on-chain economy, but also crypto’s most credibly scarce asset given ETH 2.0 and EIP 1559.

Author : Reynaldo