How do Ethereum transaction fees work now that EIP-1559 is live?

After much anticipation, Ethereum’s EIP-1559 upgrade, also known as the ‘London’ hard fork, went live last week. News of the successful upgrade has been met with a run-up in the price of Ether, the native token of the Ethereum blockchain. ETH is at an impressive $3222, up 20% since the merge took place.

But what exactly changed? And how does it impact transaction fees?

Ethereum’s latest upgrade should help to make transaction fees easier to price.

But it comes at a cost: transaction fees are even more complicated to understand.

EIP-1559 will change Ethereum’s fee market mechanism. Fundamentally, EIP-1559 gets rid of the first-price auction as the main gas fee calculation.

Instead of an auction, EIP-1559 will feature a base gas fee that changes depending on the flow of transactions on the network. The base fee will be burned, which means it doesn’t go to the miners.

In first-price auctions, people bid a set amount of money to pay for their transaction to be processed, and the highest bidder wins.

With EIP-1559, there will be a discrete “base fee” for transactions to be included in the next block. For users or applications that want to prioritize their transaction, they can add a “tip,” which is called a “priority fee” to pay a miner for faster inclusion.

EIP-1559 will also increase the network capacity by changing the max gas limit per block from 12.5M to 25M gas.

This means that when the network is >50% utilization, the base fee is incrementally pushed up. Inversely, when the network is <50% utilization, the base fee is lowered. As a result, the network will reach a balance at 50% capacity by adjusting fees accordingly to the traffic.

The big issue at stake is that the ether that would have gone to the miner in the previous iteration now gets “burned” and permanently removed from the network.

While some view this as a potentially deflationary mechanic, with a rise in price being created due to less supply, not all are on board with that takeaway.

Overall, EIP-1559 could have a major impact on the Ethereum ecosystem, but changes may be slow rather than occurring at the time of the change. The move to proof-of-stake is significant, however, we will wait to see what impact this shift will have on the cryptocurrency markets as a whole.