Why is the economic promise of Ethereum's EIP-1559 difficult to achieve? An in-depth economic analysis

Many proponents tout EIP-1559 as the “final piece” of Ethereum’s monetary policy, claiming it can reduce Gas fees, optimize user experience, and even enhance network security. But are these arguments truly well-founded? When we apply fundamental economic analysis, we find that EIP-1559 faces a fundamental logical dilemma. This is not bias against a particular stance but an objective review of the protocol’s incentive mechanisms.

1. Recognizing the true nature of EIP-1559: it is essentially a taxation mechanism

The core innovation of EIP-1559 is the splitting of transaction fees: users pay a total amount divided into a “base fee” and a “tip.” If a user spends 10 units, but miners only receive 5, where did the other 5 go? They are burned—that is precisely the definition of a tax.

If we accept that EIP-1559 is fundamentally a consumption tax, then the two basic principles of tax economics come into play:

The first principle is the incidence of taxation. It is commonly believed that taxes only harm producers (miners), but in reality, consumers (users) also suffer losses. At the market equilibrium where supply and demand curves intersect, the consumer surplus that consumers would enjoy is partially eroded, and producer surplus is similarly encroached upon. Taxation is not levied on one side alone but involves both parties in the transaction.

The second principle is the inevitability of deadweight loss. Any consumption tax causes the total surplus of both parties to fall short of the tax revenue collected, resulting in some transactions that would have occurred not happening at all—that is, the “deadweight loss.” Under the EIP-1559 framework, this means both Gas supply and demand decrease.

Imagine a medical market example: the government imposes a tax on appointment fees. On the surface, doctors’ income drops, and patients should find medical care cheaper. But what actually happens? Patients still pay the same total fee, with part of it taken as tax; meanwhile, doctors lose income and thus the motivation to provide high-quality services; worst of all, some less urgent medical needs are postponed or foregone altogether.

2. Analyzing EIP-1559’s real impact through supply and demand curves

Markets always reach equilibrium at the intersection of supply and demand curves. The Ethereum Gas market is no exception. The miners’ supply curve slopes upward—providing more Gas consumes more computational resources, increasing marginal costs; users’ demand curve slopes downward—they value transactions differently and are willing to pay higher fees for more urgent transactions.

Without EIP-1559, the market equilibrium is determined by the intersection of supply and demand. If demand is low, the equilibrium point is toward the lower left; if demand surges, it shifts toward the upper right. Miners can optimize their revenue by adjusting the block Gas limit.

When EIP-1559 is introduced, the situation becomes more complex. The base fee mechanism attempts to automatically adjust price signals, but it creates five different market scenarios:

Scenario A: Demand surges but does not hit the cap. In this case, the base fee is zero, and users only pay tips. The “relaxation mechanism” allowing temporary block size expansion benefits consumers with cheaper services—that’s the scenario supporters often cite. But the problem is: if miners find that expanding blocks increases their revenue under the current mechanism, why would they wait for EIP-1559? They would have voluntarily expanded earlier.

Scenario B and C: Demand increases, and the base fee is adjusting. Users pay base fee plus tip, but miners only receive tips. The portion intercepted by the base fee is burned, assumed to increase the value of block rewards. But block rewards do not incentivize miners to provide Gas—they only incentivize proof-of-work. It’s like reforming doctors’ salaries by replacing consultation fees with government subsidies; doctors sit at their desks but do not see patients. In these scenarios, whether miners’ income increases or decreases depends on whether the base fee fully offsets their lost revenue, but generally, it tends to decrease.

Scenario D and E: Demand declines. The base fee gradually decreases or even drops to zero. Gas costs for users may fall, but this is not because of EIP-1559’s effectiveness; rather, market demand has decreased. The same outcome occurs under the current mechanism.

3. Why the argument that “security is enhanced” does not hold water

A key claim of EIP-1559 is that it stabilizes miners’ income, preventing fluctuations caused by Gas price volatility, thereby protecting network security. The logic sounds elegant, but economic analysis reveals its fragility.

First, if EIP-1559 indeed reduces miners’ Gas fee income—as many scenarios suggest—then even if block rewards stay constant, total revenue declines. Miners have no incentive to provide more hash power to secure the network.

Second, the argument that “deflation increases currency value” is itself questionable. While deflation can increase the value per unit of currency under the assumption of constant money supply and velocity, it does not necessarily increase miners’ actual income. If burning part of their assets makes them wealthier, we have already seen firms competing to burn assets to become “richer.”

Most critically, EIP-1559 cannot be effectively manipulated by miners (which is true), but that does not mean it is superior—because miners do not need to manipulate it. Regardless of whether EIP-1559 is implemented, miners control the block packaging process. Their incentives are the decisive factor, and EIP-1559 actually weakens these incentives.

4. Response to the “common pool” theory

Some argue that Ethereum’s block space is a common resource, and miners are merely “rent-seekers” on the commons. Since block rewards already incentivize miners to protect the network, Gas fees should be viewed as unnecessary extra income.

This argument makes a fundamental mistake—confusing the two functions of proof-of-work. PoW not only secures the network but also plays a core role in transaction ordering. The ordering function is inseparable from security; it cannot be incentivized solely through block rewards.

If we accept the “block space as a common resource” logic, then the fundamental principle of common resource governance is privatization—defining property rights through competitive ability. In this case, it means that mining pools with stronger capabilities should obtain larger shares. In other words, Gas fee competition is the mechanism for the rational allocation of block space, not a crime.

Removing or reducing Gas fees results in only one outcome: the most optimized miners cannot earn returns commensurate with their efforts, leading to a reduction in their incentive to optimize. Long-term, this harms the entire network.

5. Data speaks for itself

Beyond theoretical analysis, real-world data provides the most convincing evidence. Observing Ethereum’s historical data, during periods of low Gas fees, block utilization hovers around 80%—mining pools prefer to include empty blocks rather than operate at a loss. When Gas fees spike to high levels, block utilization quickly exceeds 95%. Why? Because now, each transaction packed costs miners real ETH. Miners without optimized nodes or network infrastructure are forced out, and only the most efficient pools survive and thrive.

This demonstrates the power of market economics. Throughout history, no mechanism has been more effective at stimulating production and reducing costs than market competition. All other systems incentivize profit from non-productive activities. Blockchain is no exception.

6. Conclusion: EIP-1559 struggles to fulfill its original promises

When applying rigorous economic analysis, the core claims of EIP-1559 collapse one by one:

• Cannot reduce Gas fees: Prices are determined by supply and demand; cutting miners’ revenue only weakens their incentive to optimize supply.
• Cannot improve user experience: Users’ actual costs are unchanged; only the labels “base fee” and “tip” are added.
• Cannot enhance security: Deflationary effects do not prove increased miner income; instead, they may weaken security by reducing Gas incentives.
• Theoretical arguments are incomplete: Many supporting opinions either misunderstand market principles or only highlight effects beneficial to certain groups.

This is not to say EIP-1559 has no value—its relaxation mechanism can temporarily alleviate congestion during demand surges. But this advantage is offset, and even outweighed, by its negative impacts in other scenarios.

Those truly seeking to improve Ethereum should return to fundamental economic principles: maintain incentive-compatible fee mechanisms, ensure excellent miners are rewarded for their efforts, and let market forces, far more than any carefully crafted political scheme, determine the network’s future.