Ethereum EIP-1559 London Hard Fork.. How Does Gas Cost and Miner Profitability Change?
U.S. payment company Square decides to issue the first $5 million bitcoin fund, and cryptocurrencies and virtual currencies Newswire [Blockchain Foreign Press News Briefing]
June 14 Coincode Blockchain Foreign News Briefing
▲ Three large cryptocurrency exchanges are considering entering the Indian market
Reuters, citing an official, reported on the 10th (local time) that it was revealed that several large cryptocurrency exchanges were planning to expand their business in India, where the regulatory situation remains unclear. According to the report, Kraken, Bitfinex, and Kucoin are all considering entering India as exchanges that boast the highest in the industry in terms of transaction volume, liquidity, and reliability. In addition, the above exchanges are conducting research to understand the Indian market, and one company is said to be conducting due diligence (due diligence) of a company considering a purchase. On the other hand, none of the exchanges responded to Reuters’ questions. In India, there were also reports that a bill to ban all cryptocurrency transactions is being reviewed in March of 2021, but in May, the possibility of regulating cryptocurrency as a digital currency is emerging. However, according to Reuters, there are about 15 million cryptocurrency holders in India worth 100 billion rupees (about 1.5 trillion won), and there are voices that the market potential greatly outweighs the risk.
(複数 no big deal)
▲ U.S. payment company Square decides to issue the first $5 million bitcoin fund
U.S. payment company Square announced on the 10th that it has created a new Bitcoin (BTC) endowment worth 5 million dollars (about 5.57 billion won) and announced the first grantee, Coinpost reported on the 10th. Reportedly, Square supports Black Bitcoin Billionaire, an organization that aims to disseminate cryptocurrency and wealth knowledge among black people. In addition, it is said that Square lends the Bitcoin purchased as a corporate financial asset to Genesis, a cryptocurrency lending business, and supplies funds to the ‘Bitcoin Fund’ by using the interest. According to the person in charge, Square will support various projects from $5 million in funding sequentially on a quarterly basis over the next several years, and is accepting applications for Bitcoin funding online. Meanwhile, it is currently unknown how much of the subsidy was awarded to the ‘Black Bitcoin Billionaire’.
(米決済企業Square)が、500万dol（約5.5億円）規模「Bitcoin（BTC）基金（Bitcoin Endowment）」として暗号資産（仮想通貨）や富についての知識を普及Surukotoを目指す団体「Black Bitcoin Billionaire」を助成sur。)
▲ Global intermediary company Interactive Brokers announces plans to enter the cryptocurrency market in earnest
Interactive Brokers, a global brokerage company, plans to start providing cryptocurrency trading services on its platform before the end of this summer, Coinpost reported on the 10th. According to the report, on the 9th, Thomas Peterpi, the founder of Interactive Brokers, said at the online conference ‘Global Exchange and FinTech Conference’, “Customers are looking for cryptocurrency trading” and “We will prepare to provide trading services until the end of summer.” ” he said. On the other hand, there is also an analysis that the launch of interactive brokers will lower obstacles for individual investors to enter the cryptocurrency market.
(大 手 ブ ロ ー カ ー 企業 Interactive Brokers (イ ン タ ラ ク テ ィ ブ · ブ ロ ー カ ー ズ) は, 今年 の 夏 が 終 わ る ま で に, 自 社 の プ ラ ッ ト フ ォ ー ム で 暗号 資産 (仮 想 通貨) 取 引 サ ー ビ ス の 提供 を 本 格 的 に 開始 す る 予 定 で あ る こ と が 分 か っ た. CNBC nabe sea omedia が報じita。)
▲ Massive arrest by Chinese police on charges of telecommunication fraud.. Some allegations of money laundering in cryptocurrency
Chinese police have arrested more than 1,000 people on charges of telecommunication fraud, and some have accused them of money laundering using cryptocurrencies, Coinpost reported on the 10th. According to the official WeChat account of the Chinese police authorities, the arrests have led to the arrest of about 1,100 suspects related to telecommunication fraud, including those who laundered money using cryptocurrencies, and reported that 170 criminal organizations were destroyed. Telecommunication fraud is a crime that involves the theft or counterfeiting of the SIM card of a smartphone, or the impersonation of a bank account holder. In the past, criminals laundered money through banks, etc., but now, as the monitoring by banks is strengthened, criminals tend to launder money using a new method called cryptocurrency. The arrests are said to have been carried out on a large scale in more than 23 provinces, including Beijing, Hubei and Shaanxi. Meanwhile, China has already arrested more than 300,000 people, including this case, since it announced a policy to strengthen crackdowns on telecommunication fraud in October last year, uncovering about 1,500 criminal organizations.
(Chinese people’s opinion is limited to 1,000 people.
▲ Raising about KRW 12.6 billion in investment rounds such as Flare Network (FLR) and DCG
The smart contract platform Flare Network (FLR) announced on the 9th that it had raised about 12.6 billion won ($11.3 million) in the investment round. According to the report, the companies that participated in the investment were industry-related companies such as DCG, the largest cryptocurrency investment company in the United States, Hong Kong blockchain VC Kenetic Capital, and Coinfund. The Flare Network is a project funded by Xpring, an investment division of Ripple, and aims to become a secure and highly scalable network by implementing smart contract functions with various blockchains such as XRP. The release of the mainnet was scheduled for the end of June, but there was a possibility that it could be delayed. Regarding the vision of Flare Network, Kenetic Capital’s manager Jehan Chu said, “By implementing smart contract functions such as Ripple (XRP) and Dogecoin (DOGE), more It becomes possible to get utility.”
(Smart Coin Track Plat Fume Flare Network (Flare Network (FLR))
[Coin code provision/Blockchain Valley edit]
[Reference] Ethereum EIP-1559 London Hard Fork… What Changes?
Editor’s note: The Ethereum hard fork is scheduled for this coming July. Many changes are expected in Ethereum, which applies the new gas fee model. Coincode’s translation of the commentary and impact of ‘EIP-1559’ was translated by Hasu (@hasufl), a researcher at Debirit, a large cryptocurrency derivatives exchange, through Coinpost.
EIP-1559 of Ethereum Improvement Proposals, which introduces a new fee model such as gas fee to Ethereum (ETH), will be included in the London hard fork. The Ethereum London hard fork is scheduled to be implemented around July 21st.
[Ethereum EIP-1559 Summary]
EIP-1559 is a proposal to reduce the bottleneck by allowing Ethereum network users to pay a fixed base fee and tip miners.
In Ethereum, the higher the transaction fee (gas fee), the shorter the transaction time. However, this causes various problems because there is no accurate information about fees (it is not possible to know who offered how much in a bid method). To solve this, a basic fee (minimum cost that must be paid for a transaction) policy will be introduced. This allows users to predict the fee price in advance. In addition, the basic fee will be incinerated. Incineration will soon reduce the supply of Ethereum, raising expectations for an increase in value.
In addition, it is proposed to increase the block size from the existing 1.25 million gas to 2.5 million gas, and the scalability can be increased, enabling smoother transactions.
[What is EIP-1559?]
EIP-1559 is a proposal that significantly improves the way users transact on Ethereum. However, the structure itself has already been adopted by other blockchains such as Filecoin (FIL), Celo (CELO), and Near Protocol (NEAR).
Ethereum holders need to submit a bid called ‘gwei/gas’ to the network when passing a transaction in a transaction. When a block is found, ETH miners (miners) fill the block with “top N” transactions, and pay ETH (gwei/gas) of the amount they bid for each transaction.
In other words, you can transfer money at a faster rate by paying a higher gas fee. However, if many people offer a higher gas fee to each other for fast remittance transfer, processing speed will be delayed and gas fee will only increase.
In addition, due to the rise of the DeFi (Decentralized Finance) market, transactions have become more complex and gas fees have also risen. (Recently, NFTs have also contributed).
So, in EIP-1559, the price auction method was abolished and moved to another mechanism called fixed-price quote sales. In fixed-price sales, the protocol offers a price, and the user can choose whether to pay that price or not.
The next big advantage is that the price offered (called the base fee) is burned rather than paid to miners. Every public blockchain needs to attract miners (in the case of PoW) and stakers (in the case of PoS) for its safety. How much Ethereum is currently spending on security is closely related to the congestion level of the network.
When the congestion level is high, the fee is high, which increases the reward of the miner. However, even if the congestion level increases, the demand for security does not increase significantly. If that happens, Ethereum will pay more for security than necessary. This structure was made at the expense of ETH holders, who provide security from newly created block rewards, 2 ETH per block + uncle rewards (a reward for uncle blocks that are created at the same time by chance; in other words, orphan blocks). situation is doing.
After EIP-1559, holders continue to pay block rewards when congestion is low. However, when the degree of congestion is high, the security maintenance fee is financed by the demand of the transaction payment entity (remittee), so that the holder does not need to pay the security maintenance fee. That is, it is implicitly refunded by the burning mechanism.
There are also several other advantages. If you want to know more details, it would be good to start with ‘Analysis of EIP-1559’.
[What is the significance of EIP-1559?]
So, why is the EIP-1559 important?
I (Debirit researcher Hasu) is a researcher focusing on the economics (economics) and security of public blockchains centered on Bitcoin (BTC) and Ethereum. The EIP-1559 is one of the biggest and most exciting upgrades in my area of expertise, affecting both sides.
The more I researched the mechanism of EIP-1559 and its possible alternatives, the more I understood the idea. I am convinced that EIP-1559 will be great for all blockchains that adopt it, and recently they are getting more involved in Ethereum’s governance to confirm this.
[Is EIP-1559 a good proposition for ETH?]
There are several reasons why I think the EIP-1559 is good for the price of ETH.
First of all, there is a possibility that the overall experience when using Ethereum will improve and the margin adoption rate will increase as the transaction fee structure is improved.
Next, some point out that by burning the basic fee (gas), a part of the profitability income (ETH) currently earned by miners can be internalized. Accordingly, Ethereum (ETH) changes from a non-productive asset to a productive asset. It is like starting a new business and earning a lot of money.
And by lowering inflation (Ethereum (ETH) becomes deflation in some cases), the attractiveness as an asset to accumulate wealth is added, and the target audience can be significantly expanded. This theory has already been discussed in the mainstream financial media.
However, the above issues are not generally recognized, particularly in the mining industry. Our community is not only playing a zero-sum game around fee distribution (profitability) between miners and ETH holders, but also competing with dozens of other protocols for what Ethereum itself sees as a huge target market. Growing a pie has benefits that benefit everyone.
[Will EIP-1559 Lower Gas Fees?]
Gas prices are primarily a result of supply and demand, not a market principle. The market structure may have some effect, for example by reducing over-bidding. However, the opposite effect can also be seen. With the improvement of UX (user experience), there is a possibility that the user will pay a higher amount than the current one to conduct a transaction.
Ultimately, the total capacity in the block does not change, and the supply of transactions does not change. Only increasing scalability (the ability to increase processing capacity based on usage) will lead to lower gas fees in the long run. In other words, EIP-1559 itself is not a proposal to lower the fee, but a foundation for improving scalability.
[Effect of EIP-1559 on Miner Revenue]
In EIP-1559, the piece now known as the gas fee is split in two. There are two of them: a basic fee (set by the protocol) and a tip (set by the market). The basic fee for each transaction is burned and the tip is paid to the miner who continues to operate the miner.
The figure below compares the profits of miners before and after the implementation of EIP-1559.
What will be the current sources of income for miners after the implementation of EIP-1559? What is the impact on the miner’s profit (profitability)? For the following two reasons, it cannot be predicted as simply as it was originally thought.
First of all, it is not clear what the basic fee and tip ratio is. Until recently, most people thought (and they still think so) that all fees are burned, but in reality, that’s not the case.
The first 10-20 transactions in each block tend to pay disproportionate transaction fees that far exceed the amount needed to be included in the block. This is because a block must be in its infancy to complete a transaction. Miners now benefit greatly from these transactions, and many of them are unaware of this fact.
This portion of revenue is not affected by EIP-1559. This is because it is not burned because it is paid as a tip rather than a basic fee. Georgios (Paradigm’s research partner) and I recently made a surprising discovery by quantifying the importance of this “preferred deal” compared to a normal deal.
Depending on how correctly MEVs are being classified in our data source (MEV-Explore v0 with Flashbots), miners today are likely to benefit more from remittances selling high-priority gas than selling regular gas. turned out to be highly probable. As a result, there is a possibility that less than half of the current fee will be burned to EIP-1559.
(The figure is a chart of block remuneration, fee, and MEV ratio.)
Next, a miner’s revenue is also highly dependent on the price of ETH. For example, if EIP-1559 lowers the miner’s profit (ETH) by 30% and the Ethereum price in US dollars rises by 43%, the miner’s profit (profitability) according to the mining method is the same in dollars.
[Effect of EIP-1559 on Ethereum’s Security]
At least in ETH (though not necessarily in US dollars), Ethereum pays less to miners who run miners than before. It is expected that this will reduce hash power. However, this does not impair its security insignificantly.
The reason is that if the threshold value is exceeded, the marginal utility of each unit of security decreases. Initially, the network and its users benefit greatly from all miners. However, the more miners already exist, the smaller the benefits the miners bring from additional mining methods.
As shown in the figure below, the law of diminishing marginal utility acts on the revenue to miners and tends to decrease.
In Ethereum, there is a permanent block reward of 2 ETH + Uncle Block reward per block. This compensation is set to ensure the safety of the network by itself.
In the image diagram below, it can be seen that the block reward is creating a baseline of miner returns sufficient to keep Ethereum safe.
Ethereum has a social contract called ‘Minimum Viable Issuance’. This is based on the logic that a security budget that scales according to the security needs of the Ethereum network is required. For example, if the price of ETH doubles, the amount paid to miners is also doubled. In other words, one motive for miners is to keep Ethereum secure, but the second (conflicting) motive is to pay as much as necessary for security, and not more.
The need for this motivation can be demonstrated with a simple thought experiment. Networks with native tokens inflated 100% year-over-year have very large security budgets. However, high inflation makes holding the asset unattractive as a kind of tax for holders. If the native asset, which is a blockchain, is not attractive, it is very difficult for the blockchain to become independent in the market.
In other words, underpaying and overpaying for security are both bad.
Since access congestion is increasing and high fees are also generated, Ethereum is currently in the ‘overpay for security’ part of the graph above. A lot of people (particularly miners) are pointing out that Ethereum loses hash power due to this change. They may be right about that (actually ‘case by case’), but mistakenly believe that this is an undesirable side effect. I’m seeing. Considering that someone has to pay for it, the hash power is too great. In other words, losing hash power is clearly the purpose.
This discussion is not limited to Ethereum itself, but if other networks maintain an adequate level of security and burn overlays, ETH’s attractiveness will decrease. In conclusion, if the miner’s profit is reduced, the security will also decrease, while the optimization of usability is expected. A system that spends too much money on security is less convenient for its holders, so all networks can balance that by burning fees they don’t need for security.
[Why burn the base fee?]
First of all, by burning the base fee, there is an opportunity to save congestion on the Ethereum network and the linkage with the security budget. ETH holders (and the market as a whole) can accept larger perpetual block rewards if they know that some or all of the rewards will be refunded by burning in case of high transaction demand.
Also, according to several studies, if miners’ profits (profitability) are dominated by fluctuating transaction fees, not block rewards for operating predictable mining machines, it can cause instability of the blockchain itself.
[Can miners stop the hard fork of EIP-1559?]
Like other public blockchains, Ethereum pays miners a reward for collecting a sufficient amount of hash power (stakes in the case of PoS) to secure the network. (It affects the profitability and mining method of miners) However, as explained above, it is also true that Ethereum is paying excessive security at the expense of ETH holders who actually subsidize security through block rewards. Therefore, it is completely reasonable to change it, and it can be said to be a plus for Ethereum as a whole.
Despite these controversies, some miners operating some mining rigs are threatening to oppose EIP-1559 on the grounds that it may reduce Ethereum (ETH) mining revenue. How important are their opinions really?
To address this question, Georgios and I conducted a scenario analysis. As a result, we have come to the conclusion that the best outcome for a reasonable miner is to simply accept EIP-1559. Since PoW mining is still at least a year and a half away, it holds too much of the future earnings of miners to jeopardize it with attacks that damage ETH demand or transactions on Ethereum.
Finally, it is unclear whether miners’ profits will decrease after the introduction of EIP-1559. Considering the MEV, it can be seen that the current miner’s revenue is likely to drop by about 20%. However, this figure is uncertain as it does not take into account the possibility that ETH price will rise due to EIP-1559.
[How much is the advantage for users?]
The main difference the EIP-1559 brings to traders is that they don’t have to guess and send transaction fees that are low enough that they don’t overpay for quick trades. Instead, the protocol offers a price, and the user can choose whether to pay that price, just like buying a product on Amazon. You can also offer lower fees and wait for the price to drop in the long run.
This is because Ethereum blocks do not have a fixed amount of gas and gas for each block, but have a lot of surplus space (100% surplus space to be exact), so anyone who wants to trade at the current price can trade normally. Because. Some or all of the additional space can be used if people are willing to pay.
[Coin code provision/Blockchain Valley edit]
Author/ Translator: Jamie Kim
Bio: Jamie Kim is a technology journalist. Raised in Hong Kong and always vocal at heart. She aims to share her expertise with the readers at blockreview.net. Kim is a Bitcoin maximalist who believes with unwavering conviction that Bitcoin is the only cryptocurrency – in fact, currency – worth caring about.