The demand for the Ethereum network has skyrocketed in the past two years.
As a result, the average transaction costs on the blockchain set a record in February.
The Berlin hard fork was an attempt to reduce transaction fees, at least a little. It contained four Ethereum Improvement Proposals (EIP) made by users and integrated into the code by core developers.
Let's deep dive into these EIPs to understand how transaction costs will be affected.
The first step - Berlin fork
The Ethereum Foundation planned two hard forks for 2021 as an important step from Proof of Work to Proof of Stake consensus.
The Berlin hard fork was launched at block 12,244,000 on April 15th, 2021. It includes 4 EIP focused on gas cost reduction and security improvement.
Let's take a closer look at the updates:
1. EIP-2565 - this EIP specifies an algorithm to redefine the gas prices of ModExp operation. In other words, it reduces gas costs for certain types of transactions and promotes the use of a wider range of cryptographic operations in smart contracts.
2. EIP-2718 defines a new transaction type that is supposed to be a “wrapper for future transaction types.”
In other words, it makes all types of transactions "backward compatible" using so-called "envelope transactions", which allows new transaction logic to be added to Ethereum.
3. EIP-2929 increases gas costs for “State Access Opcodes”, which has been a problem for Denial of Service attacks on Ethereum in the past. Specifically, it is about operations (“opcodes”) that access memory.
Although prices have already increased in the past, this has not yet completely defused attacks. By roughly tripling the cost when a transaction performs one of these operations for the first time, EIP 2929 should eradicate this vulnerability for good.
However, the intervention has side effects. Active smart contracts that access memory through operations are harmed by the increased gas prices, which in the worst-case scenario means they can no longer operate, and the coins are stored in the freeze. Developers want to prevent this with another EIP.
4. EIP-2930 defines a new transaction type that contains a list of addresses and keys and pre-defines them for another transaction. In other words, it allows users to create templates for future complex transactions in order to reduce gas costs. This allows smart contracts to reduce the increased gas prices through EIP 1229.
If you want to understand how gas costs will be affected after the Berlin hard fork, you can read about this here.
The above-listed EIPs have had a slight positive effect on the average transaction costs, which again skyrocketed on the 10th of May due to increased network congestion:
Picture 1: Ethereum average gas price
However, the next hard fork should trigger EIP 1559 - an important (and controversial) change to Ethereum's fee structure.
The second step - London fork overview
The most controversial EIP 1559 should be included in the London hard fork. This would change the way users pay fees for transactions.
Until now, the gas cost model is based on the auction model. Users bid with their transaction fees, so the highest bids are considered in descending order. This competitive hierarchy drives other users to pay more, just to be prioritized.
EIP 1559 should define a fixed price threshold - called the base fee -through which transactions are added in a block *guaranteed*. If a particular user would like to reach a higher position in the blocks, they can pay a "tip".
EIP 1559 also changes the receiver of these fees. Nowadays, miners earn all fees generated in the network. However, after the London fork, the base fees will be destroyed and miners will be able to receive only "tips". It is expected that the number of ETH will become deflationary thus affecting asset price growth.
The miners are not pleased about these changes. A community of pools is protesting against London's hard fork. Even though several large, cross-blockchain pools - F2Pool, Poolin, Binance, Antpool, BTC.com, and ViaBTC - support the EIP, they are against Spark and Ethermine, which together account for more than 40 percent of the hash rate. Therefore, the debate continues on how the EIP will be activated in the next network change planned for August 2021.
Picture 2: Vote of different mining pools on stopeip1559.org
What’s more?
Uniswap V2 is responsible for consuming nearly 26% of the total gas costs on Ethereum.
Picture 3: Top gas guzzlers as of 11th of May, 2021
Uniswap V3 was therefore deployed on May 5th on L1 Ethereum Mainnet, with an L2 launch on Optimism to follow shortly.
What is different with Uniswap V3?
Concentrated liquidity allows liquidity providers to choose the price range for their capital in the pool allocation.
At the same time, individual positions are combined into a single pool, creating a combined curve.
Multiple tiers for the commission will allow liquidity providers to receive different compensation depending on the degree of risk.
What's more important for Uniswap V3 users is the deployment of Ethereum Layer 2 scaling solution Optimism. By integrating an Optimistic Rollup-based Ethereum scaling solution, the DEX would be able to reduce gas fees while increasing the number of transactions processed per second.
How does it work?
The transaction is received on the main Ethereum blockchain, then executed on a Layer 2 solution afterward. The execution data is then sent back to Ethereum. A rollup provides scaling by rolling up or bundling transactions into a single one.
Due to these off-chain computations, the load carried by the Ethereum network is reduced, and also enhances its security. Below you can find an example of how Optimistic Ethereum can reduce gas costs on Uniswap.
Picture 4: Comparison of transaction costs on Ethereum L1 and Optimistic Ethereum L2
You can check more information on the Optimism website.
Mysterium will be jumping into the latest version of Uniswap DEX (V3), launching a MYST/ETH pool on the 20th of May.
We're also planning a Liquidity Engagement campaign which kicks off in early June, rewarding contributors to the pool.