The London Network Upgrade will happen on Ethereum soon and EIP-1559 is among the major changes in it. Polygon intends to adopt these changes into their network to remain compliant with the Ethereum network and tooling.
The EIP-1559 aims to change the transaction pricing mechanism to include a fixed-per-block network fee that is burned. It also aims to change block size dynamically to deal with transient congestion.
As per the EIP-1559, the transaction fee is split into a
basefee and a priority fee. The
basefee is automatically adjusted based on the last block and is burned. The priority fee or the tip is given to the miner. This means that some ether is burned after each block, inflating the value of each ether.
On Polygon, we have a fixed token supply of MATIC as opposed to a more nuanced supply of ETH on Ethereum. Burning MATIC would mean restructuring payouts like the total checkpoint reward. We want to implement EIP-1559 and address transaction fee volatility without burning the
basefee immediately. The burning can be decided later through DAO.
We propose that instead of burning the
basefee, we transfer it to our new contract account which will be governed by DAO, and hence the community can together decide how to spend it.
To understand why this works, let us briefly discuss why burning is the accepted strategy on Ethereum. The core idea is to remove the miner incentive to manipulate transaction fees in order to gain more revenue. By burning the fee it is ensured that the miner has no incentive to superficially inflate the prices. On the other hand, burning ensures that each token holder receives a share of it as it inflates the price of the asset.
Another strategy could be not burning but distributing the fee to future miners. Although this idea does not increase the token value for all token holders, this nevertheless removes the incentive for miners/validators to cheat by artificially inflating transaction fees. In particular, it can be shown that this strategy ensures:
- Myopic validators who are focused on short-term revenue will maximize their utility.
- Under the assumption that the
basefeeis not excessively lower than demand, this is an optimal strategy for users submitting transactions.
- Disincentivizes off-chain collusion between the user and the validator.
We argue that our proposed strategy of depositing the funds to the contract is akin to the strategy of paying future validators. This is because the DAO will be able to spend the fund on improving and maintaining the network, yielding better long-term gains for all validators. It also ensures that all token holders will benefit too, without having to burn tokens and inflate value.
Edited to Add
We want to emphasize that the
basefee will be sent to a new contract. The contract will be controlled by DAO. The entire community can then decide whether to burn it, transfer it to only validators or submit new proposals about how they want to spend this fund.
Also added clarification about the burning of MATIC. At this point, this is just a proposal and we are actively looking for feedback from the community about how this can be improved and other possible alternatives that can be pursued.