Why is it that all Ethereum miners will eventually accept EIP-1559?

The congestion of the Ethereum network has become more and more serious. The EIP-1559 proposal to solve this problem has attracted great attention from the market, but it is still resisted by many mining pools.

Recently, well-known encryption researcher Hasu and Paradigm Capital research partner Georgios Konstantopoulos published a blog on Deribit Insight and pointed out that after examining various potential options for boycotting miners, they believe that any form of active protest by miners will cause more long-term than cooperation with users. The miners lost their income, so they will eventually accept the EIP-1559 proposal.

EIP-1559 is one of the most anticipated Ethereum upgrades ever. It fundamentally changes the way users bid and trades and brings other major benefits.

EIP-1559 has received overwhelming support from the community and is technically ready to join the hard fork at the Berlin conference after the Ethereum core developer evaluation process. Recently, miners have begun to oppose this proposal. This is not surprising, because this mechanism will consume some of the transaction fees that miners have already received.

Although this seems counterintuitive, our assumption is that the best strategy for miners is to support the deployment of EIP-1559.

We test the hypothesis by examining the two most effective methods for miners to oppose the proposal: (1) Forking Ethereum to create an altcoin without EIP-15559; (2) Preventing Ethereum from being listed by driving the basic gas fee to zero Implementation of EIP-1559.

After considering the feasibility and opportunity cost, we found that any form of active protest will cause more long-term miner income losses than cooperation with users.

01

Miners are ETH long-termists

EIP-1559 will affect the income of miners. At present, the income of miners includes three sources:

First, a subsidy of 2 ETH per block and additional rewards from the uncle block;

Second, the user fees for entering the block space market through bidding (regardless of their final outcome in the block).

Third, the parts that are difficult to quantify but are of high value can be extracted by miners by inserting transactions at specific points in the block. This is the so-called  miner extractable value  (MEV), and most miners currently  outsource ” it to the front-end arbitrage robot, which conducts auctions in the memory pool.

After launching EIP-1559, miners will continue to receive the same income from block subsidies and MEV. As long as the system is not crowded (demand is lower than the maximum gas limit), the value of the base fee will be destroyed. When the demand exceeds the maximum Gas limit, an additional first price auction will be held between traders, and the proceeds will belong to the miners.

In order to receive these rewards, miners must invest in mining hardware, power purchase agreements and other capital expenditures. These investments make them need a large amount of Ethereum and the Ethereum economy, because they have to mine to get a return.

Although we do not deny that EIP-1559 may reduce one of these three sources of income, miners still have sufficient sources of income to protect Ethereum and its users in the future. Even without all the basic costs, MEV and large subsidies will still be an important source of income for miners. The deployment of this upgrade may also mark a turning point in user demand for Ethereum, and will ultimately promote the development of the entire Ethereum economy.

02

Users are part of the Ethereum economy

To understand the dynamic mechanism of the development of Ethereum, it is necessary to first understand that these three sources of income come from users and the applications and businesses that serve them.

Users create a demand for ETH, and then miners sell it to them in exchange for fiat currency and other tokens in the Ethereum ecosystem. They have incurred congestion costs for these tokens for transactions, borrowing and other needs. Their use of DeFi applications such as DEX has created MEV and other opportunities for miners in the form of fixed price arbitrage.

The user is the Ethereum economy. Miners provide services to them in the form of network security. This is a transactional relationship-miners do not provide this service out of their own will, but in response to the economic incentives created by users.

Users have no other obligation to pay miners more than the cost of Ethereum security, just as miners are not obligated to continue mining when they are unprofitable.

Ultimately, the dynamic mechanism between users and miners can be explained by replaceability. It is almost impossible for miners to replace current Ethereum users as their main source of income, but users are likely to replace some or even most of the current Ethereum miners.

03

Five potential evolution scenarios

After clarifying the basic framework of the relationship between miners and users, we will apply the framework to various situations of how the EIP-1559 proposal will function after activation.

Scenario 1: Miners maintain the old chain that does not use EIP-1559

In many other blockchains, upgrading faces the daunting challenge of inherent miners. This is because it is usually more economical for miners to do nothing and stay on the existing blockchain, so it is normal to prevent new proposals from being passed.

Due to the severity of congestion, this will not happen in Ethereum. In short, if there is no hard fork to improve congestion, the difficulty of mining will increase until Ethereum itself comes to a standstill. This makes it impossible for users to stay on the old chain for a long time-any opponent of the EIP-1559 proposal needs to spend the same price to carry out a hard fork to resolve this problem.

Scenario 2: A miner uses the state of Ethereum to create an altcoin

A more feasible proposal is to allow miners to simply fork Ethereum and create their own altcoins, similar to the way ETC used to fork from ETH or BCH from Bitcoin. Whether a fork makes sense depends on the opportunity cost of doing so. In the case of EIP-1559, miners must decide between mining a new altcoin and the existing Ethereum.

Opportunity cost is not a joke, because in order to pay any income to miners, the blockchain first needs to create value for users in order to obtain valuable block subsidies, congestion fees and MEV (miner extractable value). Both Bitcoin and Ethereum have been forked dozens of times (or even hundreds of times), but most of these forks have never been favored by users.

In Bitcoin, state is just a list of currency ownership. BCH forked this list to take advantage of Bitcoin’s existing supply allocation and airdrop new coins to all BTC holders.

However, the state of Ethereum is more complicated, not only including the distribution of ETH, but also thousands of different tokens, smart contracts, applications, etc. These will also be copied to the forked blockchain, but they are just a skeleton on another chain.

For example, many tokens on Ethereum (such as stablecoins or WBTC) are claims on assets in the real world. Copying tokens will not copy assets. These declared tokens will continue to run on the EIP-1559 Ethereum chain, but are worthless on the fork chain.

As a result, the remaining DeFi applications on the fork chain that rely on collateral will also be dissolved, such as the collateral-backed stablecoin DAI or any form of AMM pool. In short, everything except ETH, including important off-chain infrastructure, such as oracles, liquidation robots, etc., will collapse and cause huge chaos on the forked chain.

Although ETC was able to fork from Ethereum in 2016, similar events are no longer possible today. The emergence of tokenized assets and DeFi has made the state of Ethereum unforkable.

Scenario 3: Miners create altcoins with new status

If the state of Ethereum cannot be forked, what about altcoins that only copy the security elements of the state of Ethereum (such as the distribution of ETH), or even start from a completely fresh state?

This is more feasible than Option 2, as demonstrated by other  stateless  branches of Ethereum (such as Tron and the recent Binance Smart Chain (BSC)). In particular, the success of the latter proved that the use of Ethereum’s virtual machine (EVM), existing wallet infrastructure (such as Metamask) and developer tools will be of great value. In addition, although DApps will not be copied automatically, their deployment is very simple, and new assets can be populated later.

Given the rapid success of BSC, will there be market demand for the use of PoW mining instead of the  permissionless  version of the blockchain of centralized operators ? The new chain can even increase the gas limit to target users who cannot get Ethereum due to the high gas price.

However, further thinking, this method is also full of problems, the problem lies in supply distribution.

If the new chain decides to reset the supply allocation of ETH and start from 0, it will lose the existing supply allocation. It will take years of high inflation to guide new supply allocations, making assets unattractive. In contrast, BSC does not have this problem because Binance is the only block producer and does not require additional mining incentives.

However, if the new chain replicates the distribution of ETH, then a lot of new ETH will be in the hands of potential hostile users, who may use it for a long time to drive down prices. This will make any block rewards obtained by miners on the new chain become worthless, and shows that even a  stateless  fork requires some support from existing users.

Scenario 4: A miner joins a new chain, but EIP-1559 is blocked there

As we have already discussed, any attempt to create an altcoin is basically doomed to fail. This leaves another possibility, which is also the one most discussed by miners. In this case, miners will join the new Ethereum blockchain, but then suppress the EIP-1559 mechanism from burning any ETH by controlling the basic fee to zero.

The method will work as follows: The EIP-1559 controller determines the basic cost of the next block by observing the size of the previous block. If the previous block exceeds the target gas limit (50% of the maximum limit), the basic cost is Fees will increase to limit transaction demand. If it is less than the target gas limit, the base fee will be reduced to stimulate demand.

Miners can technically control the number of transactions, so they can control the block size and thus control the basic cost. If they only mine less than half of the blocks, the base fee will never increase above zero, so no fees will be burned. However, the competition between different miners makes this strategy impossible in practice.

First, suppose there is a single mining pool with 5% hash power trying to implement this strategy, they will only mine half or smaller blocks, even if the demand far exceeds that level. At the same time, the other 95% of the hash power will mine larger blocks and get more income from fees, while the basic fee will increase anyway. 5% of mining pools will soon realize that it is wasting money and losing all of its hashrate. This shows that selfish miners want to participate in as many transactions as possible when there is competition between them.

So, what if competition decreases? Imagine that not 5% but 60% of miners agree to implement this strategy. The result will be the same, because every 60% of cartel miners mine a half block, another 40% of cartel miners will mine the entire block and get all the extra income from congestion charges and MEV, and the basic fee is also Will increase over time. We call this an unstable alliance.

This strategy will only work if hostile miners find a way to eliminate competition, so that others cannot mine large blocks. With 60% hash power, they can do this by implementing a so-called miner-activated soft fork (or MASF).

The MASF will indicate that more than half of the blocks are invalid, so 60% of miners should simply ignore them. Technically speaking, these 40% of miners can still mine larger blocks, but 60% of miners refuse to mine on larger blocks, so all transactions and block rewards distributed by a few cartels will be disappear.

MASF is nothing new. Nowadays, miners can form such cartel groups, for example by restricting gas limit to increase fees, charging higher fees from larger transactions or setting minimum prices. All these strategies seem to be more profitable at first, but there are good reasons why the miners did not try to implement them.

First, they require the cooperation of many parties who do not trust each other, which is difficult to achieve. More importantly, MASF will be an unprecedented attack on the Ethereum network and its users. This will not only undermine the consensus-level network stability, but also undermine users’ trust in Ethereum. This has threatened the future income of miners, but users can also oppose this behavior more actively. For example, we want users to start broadcasting transactions directly to a friendly mining pool to deduct fees and MEV from the review pool.

In summary, for miners without MASF, basic fee manipulation is not a stable strategy. However, if miners did implement MASF, it would be an unprecedented suicide attack on Ethereum and its own investments.

Scenario 5: Miners join the new chain and successfully implement EIP-1559

In view of the low satisfaction of miners in scenarios 1 to 4, we believe their main choice is to cooperate with users.

Even if the miners’ income on the new blockchain is reduced (which is not established), this is still much more than the income of trying to create an altcoin. The value of any such altcoin relative to ETH will be close to zero, and there will be no transaction fees due to congestion, and no MEV due to DeFi arbitrage opportunities.

In addition, implementing MASF to suppress basic fees will be an unprecedented transparent attack on Ethereum and its users. We have never had such an attack, and this is for good reason. This may undermine the confidence of users and the value of Ethereum as well as the economic activities that occur in the system, thus directly detrimental to the interests of miners.

04

Possible concessions and conclusions

In addition to the five options discussed above, we also discussed the different concessions that users may make to appease miners. mainly:

First, increase the block subsidy on the new chain to compensate miners for burning basic fees.

Second, change Ethereum’s PoW algorithm through EIP-969 to remove ASIC miners from the network.

Third, instead of destroying the basic cost, it is better to allocate it to the miners of the next N blocks.

However, we once again emphasize that it is in the best interests of miners to cooperate with users to upgrade. Therefore, users do not need to meet the needs of miners and make any further concessions.

This is how we hope the upcoming transition of EIP1559 will play out, and we are full of confidence in these analyses. We look forward to discussing these views with the community at the upcoming EIP-1559 roundtable (February 26, 2021).

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