Ethereum Improvement Proposal (EIP) 1559 was an integral piece of the London hard fork on Aug. 4. The EIP was aimed at stabilizing the transaction fee market, cementing the economic value of ether (ETH) and combating the inflation rate that comes through miner rewards. Since it was first implemented last month, some 297,000 ETH in base fees – worth over $1billion at the current exchange rate – has been “burned” and permanently removed from the circulating supply.
Six weeks after the hard fork took place, the network is beginning to reap the benefits of the upgrade. While transaction fees are still nearing all-time highs, gas price volatility has narrowed. Gas price is defined as the amount users are willing to pay for a unit of gas, measured in gwei.
There are two kinds of fees that combine to create the Ethereum transaction fee amount: the base fee and the priority fee. The base fee is the mandatory price a user must pay for their transaction to be added in a block; the priority fee, or tip, is discretionary and can be included to incentivize miners to prioritize the transaction.
The fee market upgrade in EIP 1559 implemented a 12.5% base fee increase or decrease per block, depending on the level of demand in the previous block. Post-upgrade, the miners still receive the priority fee; however, all the ether used for the base fee is now “burned” or permanently removed from the network.
Several days have even been net deflationary for the asset as base fees outweigh block rewards, and investors have noted the newfound scarcity. The burn mechanism is on pace to eliminate 2.56 million ETH that would otherwise be inflating the supply over the course of a year. At current prices this is $8.89 billion and nearly 2.2% of Ethereum’s total market capitalization.
An increased demand for “block space,” created by network usage, has been largely the result of the explosion in the non-fungible token (NFT) market. NFT marketplace OpenSea has been responsible for the burn of 42,072 ETH to date, outpacing Uniswap, wallet-to-wallet transactions and NFT trading game Axie Infinity.