Ethereum's fee structure

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A big change to Ethereum’s fee structure is in the works.

It stands to solve a critical issue that has been surfacing at an increasing pace in the last few months. Ethereum is still by far the most popular platform for blockchain applications to build on. And people love what is being built on Ethereum, so much so that the network gets completely overloaded from time to time. We all witnessed this first in the ICO boom of 2017, and more recently with decentralized financial applications. 

Ethereum handles its transactions in an auction-style. Users pay a fee to the miners to have their transactions processed on the blockchain. The higher you pay, the faster the miners pick them up. When the platform experiences a sudden surge in transactions, users start to bid more in order to get picked up faster, leading to an increasing transaction fee. Projects and users who are not aware of the change in fee, are stuck in ‘’pending’’ until the surge is over, and the backlog gets processed. 

As Ethereum grows, you can understand this is not sustainable. 

The EIP 1559 change

EIP 1559 (Ethereum Improvement Proposal) will be a great quality-of-life upgrade for Ethereum enthusiasts. It delivers some great benefits: 

Predictability of transaction fees. This is great for projects who set transaction fees for their users. 

Lowering of transaction fees. In times of increased activity on the network, transaction fees shift at a minimal range for users because there is no mechanism that drives up the price. 

Quicker transactions. Due to faster processing.

A portion of Ether is burned with every transaction.  

Especially this last point has far-reaching implications for the economic model of Ethereum. With this, Ether becomes a deflationary asset. From an investment point of view, this is an essential change. It will create a positive feedback loop on the price of Ether. Now, the popularity among developers and users will be reflected in the price. 

With an average of 1 million transactions per day, and showing steady growth since its inception in 2015, this might just be the single biggest change in the history of the most popular blockchain platform there is. 

If you wish to get more indepth information of the proposal, Vitalik Buterin made a slideshow of a more technical perspective. Here it is.

The sentiment of the Ethereum community

As with every change, there is also a part of the community that does not agree with the proposed change. People who profit from high transaction fees are amongst the group strongly opposing this idea. There are concerns with difficulties to analyze the proposal and the risk of implementing such a drastic change. 

A survey was conducted to poll sentiment on the proposal. Interviewing some 25 projects from different parts of the ecosystem. 

There is still a lot of testing, documenting, and communication that needs to happen before EIP 1559 gets implemented successfully into Ethereum. But the initial prediction is that it should be able to go live in about 6-9 months. Don’t mark this in your calendar just yet though, in our experience proposals like this usually get pushed back some time. 

The future of Ether as an asset

Now let’s speculate a bit. When this would happen, what would it mean for Ether as a capital asset? 

Blockchain is growing out to be the base layer of the next financial system, and Ethereum is by far the most developed blockchain platform. The financial system is slowly adapting to crypto and adopting its capabilities. Interest is becoming ever greater and big players, like PayPal, are joining the space, connecting this with a deflationary supply and it paints a very bright picture for the future of Ether as a capital asset. 

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