EIP1559

The EIP 1559 proposed a new scheme for calculating the gas price in Ethereum. Before EIP1559, the gas price was a first-price auction. Miners preferred those transactions with the highest gas price over those with lower gas prices.

EIP1559 made some significant changes:

The gas price now consists of two parts, the base fee and the tip (aka priority fee).

The base fee per gas can move up and down each block depending on how full the parent block is. It increases if the gas used is above the gas target and decreases if the gas used is below the gas target. The base fee is burned. This means neither the miners nor anybody else receives the base fee.A user specifies the following information:

• Max Fee: The max price in Ether/Gas a user is willing to pay.
• Max Priority (or tip): price the user wants to pay to the miner/block producer

The base fee is calculated by the network.

A transaction is only valid if the sum of base fee + priority fee is lower than the max fee.

Impact of EIP1559

This EIP has a serious impact on Ethereum.

Flatten Volatility

The most prominent argument in favor of EIP1559 was to flatten the gas price volatility. The new scheme makes it easier to predict the gas price and create transactions accordingly.

In some articles, EIP1559 was seen as a means of reducing the transaction fees. But this is not the case and was never intended.

Deflationary

Since the base fee is burned, it has a deflationary effect. Money is destroyed and reduces the total number of coins available. This renders the remaining coins more valuable.

Makes Ethereum Necessary

Another impact is that now in every transaction, ETH is necessary. While gas is the unit of account, it is paid in ETH when executing the transaction. Before, transaction fees were paid in gas too. But it was conceivable that a transaction with a gas price of zero could be included in a block. To reward miners for doing this, one could pay them in tokens for example.

While paying miners in tokens is still possible, every transaction has to include a gas price (in ETH) high enough to pay at least the base fee.