EIP-1559: Why ETH Will Become the Perfect Store of Value!

Ethereum is one of the most exciting ecosystems in the crypto industry! Developers put a lot of effort into the protocol – every single day!

They work on new applications that aim to make the user experiences better. Currently, most ETH holders are excited about ETH 2.0. ETH 2.0 will make Ethereum scalable and introduces a new consensus algorithm: Proof of Stake. Ethereum will become more environmentally friendly.

However, one update captures all the attention: EIP-1559!

But which problem does EIP-1559 tackle, and why are so many people excited about the update?

Let’s dive into it!

EIP-1559 Makes Gas Fees More Predictable

EIP-1559 mainly solves two major problems in the Ethereum ecosystem:

  • Overpaying of gas fees
  • Inflation of ETH

We all know it: paying vast amounts of money for gas fees. This also has something to do with the current auction mechanism that determines the gas fee. The problem is that users find it challenging to know what other participants will bid – many users often overpay for transactions.

It’s getting even worse when front-running bots come into play! These bots look for arbitrage opportunities in the market. And as soon as they see another arbitrageur who tries to take advantage of the same arbitrage opportunity, they overbid the transaction. Thus, front-running bots over-bid each other and push the gas fees higher.

The consequence: Gas fees explode!

EIP-1559 Abolishes the Auction Mechanism

EIP-1559 introduces a BASEFEE. The fee is the market price for transaction inclusion. If you send a transaction with the BASEFEE, your transaction is almost guaranteed to be included in the next block.

The BASEFEE is variable and will change based on the usage of the Ethereum network – the more people use the Ethereum network, the higher the BASEFEE.

With EIP-1559, the current auction mechanism gets obsolete. After integrating EIP-1559, people won’t have to guess a gas fee they want to pay as the BASEFEE almost guarantees block inclusion.

EIP-1559 Makes ETH the Perfect Store of Value

Another problem in the Ethereum network is omnipresent: ETH has no capped supply! That said, Ether would be inflated to infinity! 

Nonetheless, the Ethereum blockchain needs inflation to secure the network. Without inflation, there would be nearly no or just a few incentives for miners to participate in the consensus algorithm. The miners earn money by participating in the consensus algorithm of Ethereum!

And this is where EIP-1559 comes into play!

In every transaction, the BASEFEE gets burnt! So, ETH will be inflated by rewarding participants in the consensus algorithm for securing the network. At the same time, ETH will be deflated by burning some ETH after every transaction.

The consequences of EIP-1559

After integrating EIP-1559, ETH will be an entirely different asset. It will make gas fees more predictable, and ETH will become deflationary. ETH is used for everything in the DeFi space on Ethereum:

You want to swap tokens on Uniswap? You have to pay ETH! 

You wish to collateralize a loan? You will need ETH! 

You want to interact with derivative platforms such as Synthetix? Again, you need to pay gas fees in ETH!

In other words: ETH will be the gasoline of tomorrow’s decentralized financial system! And due to EIP-1559, it is getting more scarce every day – ETH will be a scarce resource that will be used for financial services. So, as long as people use financial services, people will inevitably buy ETH!

ETH is the perfect store of value!

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