EIP-1559, short for Ethereum Improvement Proposal 1559, is a significant and highly anticipated upgrade to the Ethereum blockchain. Introduced to address some of the longstanding issues related to transaction fees and the user experience on the Ethereum network, EIP-1559 represents a fundamental shift in how transaction fees are calculated and managed.

EIP-1559 was activated on Ethereum’s London hard fork in August 2021, and it proposes a major transformation in the way transaction fees are determined on the Ethereum network.

Currently, Ethereum uses a traditional auction-style system, where users submit bids for their transactions to be included in a block. This can result in unpredictable and often exorbitant gas fees during periods of high network congestion.

Under EIP-1559, the transaction fee structure is simplified. It introduces two main components: the “Base Fee” and the “Priority Fee.” The Base Fee is a dynamically adjusted fee set by the network, aiming to maintain a stable and predictable fee environment. Users specify the Priority Fee as an optional tip to incentivize miners to process their transactions more quickly.

EIP-1559 does not necessarily make gas cheaper in all situations. While the Base Fee’s predictability prevents the extreme price fluctuations in the traditional auction system, it won’t uniformly reduce gas costs. Users can still pay higher Priority Fees to incentivize miners to prioritize their transactions.

EIP-1559 incorporates a deflationary element. The Base Fee, collected from each transaction, is burned (permanently removed from circulation), which should have a long-term impact on the supply of Ethereum. This burning mechanism can contribute to Ethereum’s scarcity, potentially impacting its value over time.