EIP-1559 will bring Ethereum fork candy? Why the miners will eventually choose to support it

Note: The EIP-1559 proposal has caused a huge divergence of opinions in the Ethereum community, and the voice of opposition mainly comes from the miner community. In this regard, cryptocurrency researchers Hasu and Georgios Konstantopoulos analyzed five types of paths that miners can choose. They believe , All attempts to oppose the EIP-1559 proposal (including various fork methods) will have an adverse effect on miners, so the best strategy for miners is to support the deployment of EIP-1559. The opinions of the article represent only the original author.

EIP-1559 is one of the most anticipated Ethereum upgrades ever. It fundamentally changes the way users bid on transactions, as well as other benefits.

At present, the EIP-1559 proposal has received overwhelming support in the community, and it is technically ready to be incorporated into Ethereum after the Berlin hard fork, and is currently waiting for the evaluation process of core developers. Recently, miners have begun to oppose this proposal, which is not surprising, because the mechanism will burn part of the transaction fees that miners have previously received.

Although this seems counterintuitive, our assumption is that the best strategy for miners is to support the deployment of EIP-1559.

We test this hypothesis by studying the two most effective methods of miners protesting this proposal: (1) Forking Ethereum, creating an altcoin without the EIP-1559 proposal, (2) By setting basefee to zero Block EIP-1559 on Ethereum.

After considering the feasibility and opportunity cost of these solutions, we found that any form of radical protest will damage the long-term income of miners more than cooperation with users.

Miners are structurally more ETH and the Ethereum economy

EIP-1559 will affect the income of miners and currently includes three sources:

Block subsidy of 2 ETH per block, and additional rewards for uncle blocks;

User bidding fees for their transactions included in the block space (regardless of the final position of these transactions in the block);

It is difficult to quantify, but extremely valuable miners can extract value (MEV for short). At present, most miners “outsource” this part of their income to scramble and arbitrage robots, who compete with each other in the mempool to compete for these income opportunities (Note: At the same time, it also leads to higher network fees, thereby increasing the income of miners).

After EIP-1559 is activated, miners will continue to receive the same income from block subsidies and MEV. As long as the system is not congested (demand is below the maximum gas limit), the cost of inclusion will be burned. When the demand exceeds the maximum gas limit, both parties to the transaction will conduct an additional first price bid, and the final bid fee will be owned by the miner.

To obtain these returns, miners must invest in mining hardware, power purchase agreements, and other capital expenditures. These investments make them structurally bullish on ETH and the Ethereum economy, because they have to mine to get a return.

Although we do not deny that EIP-1559 may reduce one of these three sources of income, miners will still have sufficient sources of income in the future to protect Ethereum and its users. Even if all basefee is burned and destroyed, MEV and block subsidies will still be an important source of income for miners. Finally, the deployment of this upgrade may also mark a turning point in the needs of Ethereum users and ultimately promote the overall economic growth of Ethereum.

The user is the economy of Ethereum

To understand the power of Ethereum, it is important to understand that all three sources of revenue come from users and the applications and businesses that serve them.

Users create demand for ETH, and then miners sell it in exchange for fiat currency and other tokens in the Ethereum ecosystem. Users’ needs for transfers, transactions, lending, etc. will incur congestion charges. Finally, their use of Defi applications, such as decentralized exchanges (DEX), creates MEV and other opportunities in the form of price arbitrage for miners.

Users are the economy of Ethereum, and miners provide services for them in the form of network security. This is a business relationship-miners provide this service not in good faith, but in response to the economic incentives users create for them.

Users have no ethical (or other) obligation to pay miners more than Ethereum’s security needs. Of course, miners have no ethical (or other) obligation to continue mining when they cannot make a profit.

Ultimately, the dynamic dynamics between users and miners can be explained by substitutability. It is almost impossible for miners to replace current Ethereum users as their main source of income, but users are likely to replace some, or even most of the current Ethereum miners.

After establishing this basic relationship between miners and users, we will apply this framework to various scenarios activated by EIP-1559.

Scenario 1: Miners maintain the old chain without EIP-1559

We mention this only for completeness, because in many other blockchains, upgrading faces an inherently tough battle. This is because users stay on the existing blockchain without doing anything, which is usually cheaper and therefore easier to prevent the passage of new proposals.

Due to the difficulty bomb, this is impossible in the case of Ethereum. In short, if there is no hard fork to reset the difficulty bomb, the mining difficulty will increase until the Ethereum network itself comes to a standstill. This makes it impossible to stay on the old chain. Any EIP-1559 counterparty will use the same cost to carry out a hard fork, at least to dismantle the difficulty bomb.

Scenario 2: Miners create an altcoin and copy the state of Ethereum

A more feasible suggestion is that miners only need to fork Ethereum and create their own altcoins (similar to ETC, or BCH forked from Bitcoin). Whether a fork makes sense depends on the opportunity cost of doing so. In the case of EIP-1559, miners must make a decision between mining a new competing chain and the existing Ethereum chain.

This opportunity cost is not a joke, because as we mentioned before, in order to pay any income to 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 of times (or even hundreds of times), but most of the forks have never been favored by any users.

When you can also fork the state of a blockchain, it is much easier to build this traction, as all successful forks in the past have done this. In Bitcoin, state is just a list of coin ownership. BCH forked this list to take advantage of Bitcoin’s existing supply allocation and airdrop new coins to all BTC holders.

But the state of Ethereum is more complicated, not only including the issuance of ETH, but also thousands of different tokens, smart contracts, applications, etc. These things can also be copied with forks, but they are just a skeleton on another chain.

For example, many major currencies on Ethereum (such as stablecoins or WBTC) are claims on certain assets in the real world. The fork cannot truly replicate these assets. These tokens will continue to run on the EIP-1559 Ethereum blockchain, but they are worthless on the fork chain.

As a result, other Defi applications that rely on collateral on the fork chain also lose their meaning, such as the collateral-backed stablecoin DAI or any form of AMM pool. In short, everything except ETH, including important off-chain infrastructure such as oracles, liquidation robots, etc., will explode and cause huge chaos on the fork chain.

Although ETC was able to fork from Ethereum in 2016, similar events are no longer possible today. The emergence of tokenized assets and Defi has made the state of Ethereum unforkable.

Scenario 3: Miners create altcoins with new status

If the state of Ethereum cannot be forked, what about altcoins that only copy the security elements of the state of Ethereum (such as the distribution of ETH) and start from a new state?

This is more feasible than scenario 2, and other “stateless” forks of Ethereum, such as Tron and the recent Binance Smart Chain (BSC) have proved this. In particular, the success of the latter proved the great value of using Ethereum’s virtual machine (EVM), existing wallet infrastructure (such as Metamask), and developer tools. In addition, although dapps will not be copied automatically, their deployment is very simple and new assets can be issued later.

Given the rapid success of BSC, will there be market demand for using PoW mining instead of the “permissionless” version of centralized operators? The new blockchain can even increase the gas limit to target users who currently cannot use Ethereum due to high gas prices.

But further thinking, this approach is also full of problems, the problem is around the distribution of supply.

If the new chain decides to reset the supply allocation of ETH and start from 0, it will lose the existing supply allocation. It will take years of high inflation to guide new supply allocations, which will make the asset less attractive. In contrast, BSC does not have this problem because Binance is the only block producer and does not require additional mining incentives.

However, if the new chain replicates the distribution of ETH, then a lot of new ETH will be in the hands of potential hostile users, who may use these coins for a long time to depress prices. This will render any block rewards for miners on the new chain worthless and show that even a “stateless” fork requires a certain amount of support from existing users.

Scenario 4: Miners join the new chain, but EIP-1559 will be blocked

As we have analyzed, any attempt to create an altcoin is basically doomed to fail. This leaves another possibility, which is currently the most discussed possibility by miners. In this case, the miner will join the new blockchain with the user, but then suppress the EIP-1559 mechanism from burning any ETH by controlling the basefee to 0.

This method works as follows: The EIP-1559 controller determines the basefee of the next block by observing the size of the previous block. If the previous block exceeds the target gas limit (50% of the maximum gas limit), the basefee will increase to limit the transaction demand. If it is lower than the target gas limit, basefee will be reduced to encourage demand.

Miners can technically control how many transactions they contain, so they can control the block size and thus the basefee. If miners can only mine blocks that are half full, the basefee will never increase above zero, so no fees will be burned. However, competition between different miners has made this strategy impossible to achieve in practice.

First, suppose a mining pool with 5% of the computing power tries to implement this strategy, and it will only mine blocks that are half full or smaller (even if the demand far exceeds this level). At the same time, the other 95% of the computing power will mine larger blocks and get more income from fees, and basefee will increase anyway. A mining pool that controls 5% of the computing power will soon realize that it is suffering a loss, and either choose to give up or lose its computing power. This shows that selfish miners want to include as many transactions as possible, as long as there is competition between them.

So what would it be like if there was less competition? For example, imagine that 60% of mining unions agree to implement this strategy. The result is the same, because every time 60% of the cartel miner group digs a half-full block, the remaining 40% of the miner group will dig a complete block and get all the additional income from the congestion fee and MEV. In this way, the basefee will still increase over time. Therefore, in this case, we call it an unstable alliance.

This strategy will only work if hostile miners can find a way to eliminate competition, so that others cannot mine large blocks. With 60% of the computing power, they can achieve this by implementing the so-called miner activated soft fork (MASF). This kind of miner activated soft fork (MASF) will stipulate that blocks that are more than half full are invalid, so 60% of miners should ignore them. Now, 40% of miners can still mine larger blocks technically, but 60% of them will refuse to continue mining on the basis of these blocks. Therefore, all transactions and block rewards distributed by a few cartel alliances Will evaporate.

Now, you must understand that miner activation of soft forks (MASF) is nothing new. Today, miners can form such cartel alliances, for example by limiting gas limits to increase fees, charging higher fees for large transactions, or setting a price floor. All of these strategies seem to be more profitable at first, but miners have good reasons not to try to implement them.

First, they need the cooperation of many parties who do not trust each other, which is difficult to achieve. But more importantly, MASF will be an unprecedented attack on the Ethereum network and its users. This will not only undermine the stability of the network at the consensus level, but also undermine the trust of users in Ethereum. This has threatened future mining revenues, but users can also oppose such censorship more actively. For example, we want users to start broadcasting their transactions directly to friendly mining pools to deduct fees and MEV from the review pool.

In summary, for miners who have not implemented MASF, basefee manipulation is not a stable equilibrium. But if the miners really implement MASF, this will be an unprecedented self-destructive attack on Ethereum, including their own investment.

Scenario 5: Miners join the new chain and successfully implement EIP-1559

In view of scenario 1 to scenario 4, the results of miners are all bad, we are sure that their main choice is to simply cooperate with users.

Even if the miners make less money on this new chain (not necessarily), it is still much more than the money made by trying to create an altcoin. The value of any such altcoin relative to ETH will be close to zero, and there will be no transaction fees due to congestion, and no MEV due to Defi arbitrage opportunities.

In addition, implementing MASF to suppress basefee will be an unprecedented transparent attack on Ethereum and its users. We have never seen such an attack in reality, and this is for good reason. It may destroy the confidence of users and the value of ETH, as well as the economic activities that occur in the system, thereby directly harming the interests of miners.

Possible concessions

In addition to the five scenarios discussed above, we also discussed the different concessions that users may make to appease miners. The main ones are as follows:

Increase the block subsidy of the new chain to compensate miners for the losses suffered by the burning basefee;

EIP-969: Change the PoW algorithm of Ethereum to exclude ASIC miners in the network;

Instead of burning basefee, for example, distribute it to miners in the next N blocks;

However, we again emphasize that it is in the best interests of miners to cooperate with users to upgrade. Therefore, users do not need to meet the needs of miners, nor do they need to make any further concessions to them.

in conclusion

The above is our expectation of the impact of the upcoming EIP1559 conversion, and we are full of confidence in our analysis. We look forward to discussing these arguments with the community at the upcoming EIP-1559 roundtable (February 26, 2021, 14:00 UTC).

1. There are other huge costs involved in bringing a new blockchain to the market.

2. We strongly recommend that you read “Ethereum Is Now Unforkable Due to DeFi” by Haseeb Qureshi. His article explained in great detail what would happen if someone tried to fork the state of Ethereum, and he concluded that this is completely impossible today.

3. For the formal analysis of the same argument, please refer to Chapter 6.2 and Chapter 7 of Tim Roughgarden’s analysis.

http: //timroughgarden.org/papers/eip1559.pdf