EIP-1559

EIP-1559 is an Ethereum Improvement Proposal that introduced a new transaction pricing mechanism, replacing the traditional first-price auction with a base fee that is algorithmically adjusted per block and burned. Each transaction also includes a priority fee (tip) for miners/validators and an optional max fee cap set by the user. This system aims to make transaction fees more predictable, improve user experience, and reduce fee overpayment by automatically setting a market-clearing price for block space.

The core innovation is the base fee burn. Unlike previous models where miners collected the entire transaction fee, EIP-1559 mandates that the base fee component is permanently destroyed (burned) from circulation. This introduces a deflationary pressure on Ethereum's native currency, ETH, as the burn rate can, during periods of high network usage, outpace the issuance of new ETH from block rewards. This mechanism directly links Ethereum's security spending (block rewards) to its economic activity.

For users, the primary benefit is fee predictability. Wallets can now reliably estimate the base fee for the next block, reducing guesswork. The user-specified max fee acts as a safety cap, ensuring a transaction will not cost more than a set amount. The priority fee incentivizes validators to include the transaction promptly. This structure creates a more efficient auction for the remaining block space after the base fee is set.

Implementation-wise, EIP-1559 was activated in the London hard fork in August 2021. It required significant changes to Ethereum's consensus and execution layers, including a new transaction type and a reformed block header to store the base fee. The proposal was designed to be compatible with Ethereum's transition to Proof-of-Stake, and its fee market logic continues to operate within the consensus layer post-Merge.

The long-term economic implications are significant. By burning a portion of transaction fees, EIP-1559 transforms ETH into an asset with potential deflationary properties, often described as introducing a "burn rate" or "ultrasound money" dynamic. The efficacy of this monetary policy depends directly on network demand; high usage increases the burn, while low usage reduces it, creating a built-in economic feedback loop for the Ethereum ecosystem.

EIP-1559 is named for its identifier within the Ethereum Improvement Proposal (EIP) repository, specifically EIP-1559. Authored primarily by Vitalik Buterin, Eric Conner, Rick Dudley, Matthew Slipper, and Ian Norden, the proposal was formally introduced in April 2019. Its title, "EIP-1559: Fee market change for ETH 1.0 chain", succinctly described its core mission: to overhaul the first-price auction model that had governed Ethereum transaction fees since its inception. The number 1559 simply denotes its sequential place in the EIP registry, following the community-driven proposal submission process.

The intellectual and technical origins of EIP-1559 stem from identified flaws in Ethereum's original fee mechanism. The legacy auction system led to unpredictable and often exorbitant gas fees during network congestion, as users engaged in inefficient guesswork to have their transactions included. The proposal's architects drew from economic theory and prior research into tipless mechanisms and variable block sizes to design a more user-friendly and economically sound model. Key inspirations included concepts from other blockchain designs and academic papers on transaction fee markets, which were synthesized into a practical implementation for Ethereum.

The "1559" structure itself became a widely recognized shorthand for the bundle of changes it introduced: a base fee that is burned, a variable block size with a gas target, and a priority fee (tip) for miners. Its implementation in the London network upgrade in August 2021 marked one of the most significant non-consensus changes to the Ethereum protocol, fundamentally altering its monetary policy by introducing a deflationary burn mechanism. The name EIP-1559 has since become synonymous with this new fee market paradigm, influencing fee market designs on other blockchain networks as well.

EIP-1559 is an Ethereum Improvement Proposal that fundamentally reformed the network's transaction fee market by introducing a base fee that is algorithmically adjusted per block and burned, coupled with an optional priority fee (tip) for miners/validators. This mechanism replaced the simple, inefficient first-price auction where users guessed appropriate gas prices. The base fee, which is burned (removed from circulation), aims to predictably match network demand with block size, targeting 50% utilization. Users specify a max_fee they are willing to pay and a max_priority_fee as a tip, with the refund of the difference between the max_fee and the sum of the base fee plus priority fee returned to the user.

The base fee is calculated automatically by the protocol based on the fullness of the previous block. If a block is more than 50% full, the base fee increases for the next block; if it is less than 50% full, it decreases. This adjustment follows a formula with a maximum change of 12.5% per block, preventing volatile swings. The burning of this base fee has a significant deflationary effect on ETH's supply, making the cryptocurrency potentially more scarce over time. This stands in contrast to the pre-EIP-1559 system where all fees were paid to miners, creating constant sell pressure from block rewards.

For a transaction to be included, the user's max_fee must cover the current block's base fee plus their chosen priority fee. Validators (post-Merge) prioritize transactions with higher priority fees. A key user experience improvement is the introduction of a variable block size. Instead of a strict gas limit, blocks can expand to twice the target size (from 15 million to 30 million gas) during high demand, though this triggers a sharp increase in the base fee for subsequent blocks. This elasticity helps absorb temporary traffic spikes without causing extreme fee volatility or persistent full blocks.

Implementation of EIP-1559 required a hard fork, known as the London upgrade, which went live on the Ethereum mainnet in August 2021. It is a core component of Ethereum's fee market alongside EIP-4844 (proto-danksharding) for Layer 2 data. While it improves fee estimation and predictability, users must still compete with priority fees during periods of high network congestion. The mechanism's design is a foundational step towards a more sustainable and user-friendly economic model for Ethereum, reducing the economic inefficiency and guesswork inherent in the previous auction system.

EIP-1559 fundamentally restructured Ethereum's transaction fee market by introducing a base fee that is algorithmically adjusted per block and burned, alongside an optional priority fee (tip) for miners/validators. When a user submits a transaction, their wallet estimates a max fee (maxFeePerGas) and a priority fee (maxPriorityFeePerGas). The wallet then calculates the total cost as min(base fee + priority fee, max fee), with any excess max fee over the sum of the two components being refunded to the user. This creates a more predictable fee estimation experience.

The base fee is the core innovation, set by the protocol itself. Its value is recalculated every block based on how full the parent block was. If the parent block was more than 50% full, the base fee increases; if it was less than 50% full, it decreases. This adjustment targets an average block utilization of 50%, creating a self-regulating mechanism for network congestion. Crucially, this base fee is permanently removed from circulation (burned), making ETH a potentially deflationary asset and transferring value from users to the entire ETH holder set.

The priority fee (or tip) is the incentive paid directly to the block producer (miner under Proof-of-Work, validator under Proof-of-Stake) for including a transaction. Users set this separately to prioritize their transaction when blocks are full. Block producers are economically motivated to order transactions by their effective tip (min(maxFeePerGas - base fee, maxPriorityFeePerGas)), as this is the revenue they keep. The flow is: User Pays (Base Fee + Priority Fee) -> Base Fee is Burned -> Priority Fee goes to Validator.

To visualize the flow: 1) A user signs a transaction with maxFeePerGas and maxPriorityFeePerGas. 2) The network's current baseFeePerGas is known. 3) The effective gas price is baseFeePerGas + min(maxPriorityFeePerGas, maxFeePerGas - baseFeePerGas). 4) The transaction is included in a block. 5) The baseFeePerGas * gasUsed is sent to a burn address (e.g., 0x000...). 6) The priority fee * gasUsed is credited to the block validator. 7) Any leftover ETH from (maxFeePerGas - effective gas price) * gasUsed is refunded to the user.

This mechanism replaced the legacy first-price auction model, which often led to overpayment and unpredictable fee spikes. By burning the base fee, EIP-1559 also introduced a deflationary pressure on ETH's supply, often referred to as 'The Burn.' The fee flow is natively supported by wallets and block explorers, which display the distinct breakdown of burned and paid amounts, providing full transparency into the economic lifecycle of every transaction on the Ethereum network post the London hard fork.