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Why are high fees in the Ethereum network good for miners? | Blocksats

Miners can receive remuneration in two ways. The basic one is the fee for confirming transactions in the form of newly created coins. The second way is to participate in transaction fees that are charged to cryptocurrency users. Let’s take a closer look at the latter method – it turns out that sometimes transaction fees can be an important component in pay. The best example of this is the current situation in the Ethereum network, where the level of fees is very high.

Transaction Fees

Depending on the scalability of a given cryptocurrency blockchain, it may have different bandwidth, which translates into the ability to effectively add new transactions to blocks. Usually, when network traffic is moderate, transactions are added on a regular basis, and the level of fees is relatively low. In the moments when the network traffic is increasing, there is a network jam, and as a result, users should increase the transaction fee in order to ensure quick addition of transactions. Only transactions with a higher commission will be handled by miners first. In the history of cryptocurrencies, we have had periods of increased activity several times. And so in the Bitcoin network it was a fever associated with a record valuation from the turn of 2017/2018. At peak times, the cost of adding transactions to the network could be up to 50USD. In the Ethereum network, the boom associated with CryptoKitty was the loudest, which overloaded the network for many weeks.

What is the situation on the Ethereum network?

Currently in the Ethereum network the level of fees is very high, the base value of the block is 2 ethers, currently the remuneration ranges from 2.3-2.6 ethers. For a miner, this means an average income of 15-30% higher than the norm. The Ethereum development team recognized this phenomenon and began work on making the charging system more flexible. This is the essence of motivation in the creation of EIP1559. The point is that the transaction fee system in Ethereum is not optimal and rewards overpaying, and a way to improve this system would be to introduce a mechanism that would adapt the basic network fee to the network demand. As a result, the efficiency of the level of network fees would increase and the degree of complexity of this part of the software appearing in clients (portfolios) supporting Ethereum, which are responsible for estimating the appropriate level of network charges, would decrease.

In the current system, the newly submitted transaction must wait until it is included in the next block created by the miner. Currently, the easiest way to guarantee a place in the next block is to increase the “gasPrice” parameter by such a pending transaction above the average in the network. Górnik always tries to fill new blocks with transactions that will increase his salary, and a transaction with a high “gasPrice” meets this condition in 100%.

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The problem with such a system is the fact that in times of high demand, the level of network charges can quickly reach unreasonably high values. When the blocks are almost full, users start bidding “who will give more” and artificially inflate the value of the network fee to just secure a place in the next block. Miners, in order to minimize the impact of this phenomenon in some way, have the opportunity to increase the number of transactions that can fit in the next block. However, this mechanism cannot change very quickly. There is a second fact. From the miner’s point of view, it is more profitable to settle for a small but full block than increasing the “gas limit” due to the increased risk of “Uncle” (i.e. digging an incomplete block). In particular, if the wallet prioritizes inclusion of the block in the network in a short period of time, it may happen that you have to pay a network fee worth several times the value of the transaction that is being sent.

To combat this phenomenon, EIP 1559 introduces the concept of “basic network charge”, which is to dynamically adapt in such a way that the total consumption of “gas” is to reach the value of 10 million. In addition, instead of getting into the pocket of miners, the “basic network fee” will be burned, which means that these coins will be irretrievably destroyed. However, it will be possible for the person sending the transaction to include in it an “tip” that will go to the miner who will make such a transaction in the block.

The great advantage of the fact that the basic transaction fee does not change dramatically in response to instantaneous network demand is that users are protected from the effects of the “bidding” phenomenon. Because the basic transaction fee is burned and is not transferred to the accounts of miners, they have no reason to attempt to manipulate the value of the transaction fee in order to increase the remuneration obtained. The third advantage is the attempt to solve the problem of automatic estimation of transaction fee by Ethereum payment processors, by ensuring that it will be more predictable.

Alternative solutions for the Ethereum network

Due to possible problems in the implementation of EIP 1559 for the current Ethereum wallets, which will have to undergo significant changes because of this, a counter-proposal was issued by developers to EIP 1559. Dan Finley proposed an alternative solution called “Escalator”, which, despite being very similar however, it introduces several important changes to the EIP.

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Instead of ordering a transaction with a fixed fee value, the user assumes an “escalating order” and specifies the maximum amount he is able to pay for the transaction in the next block. All orders are placed in a queue of pending transactions, which in a predictable way increases the value of the fee at the same rate as other wallets / payment processors. Thanks to this, miners can still choose the highest values ​​from the queue of pending transactions. The main advantage of such a solution is determining the value of fees in an efficient and predictable manner, and thus protecting users against paying too high transaction fees.

High transaction fees and miners’ salaries

From a miner’s point of view, the state of increased transaction fees constitutes additional income and is welcome. After all, for the same work done, the miner will receive a higher salary. Very important, if we want to take full advantage of the favorable circumstances, it is worth checking whether the selected mining platform pays commissions from the transaction fees to miners or just stops at the base remuneration for creating a new block. It is also worth checking what policy is applied in relation to prioritization in selecting transactions with increased fees, welcome that the mine tries to choose those with the highest fees. Only Polish Ethereum mining platform he applies such a policy, consistently stating that both the base reward for the block and all transaction fees added to the block are 100% owned by miners working on the mining platform. There is something to consider if the average value of the fees is 15-30% of the salary, mentioned above. Sometimes there are blocks of much higher value and such “pearls” are today most desired by miners.

Author: Marcin Żywica from ŻET Technologies

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