Ethereum Insiders to Get Fee Cuts That Others Won’t in Upgrade

    When the Ethereum blockchain undergoes its next major upgrade, some key participants will likely see fees decline.
    By: BLOOMBERG
    | Updated on: Nov 07 2022, 00:27 IST
    ethereum
    With coin prices having dropped in the current bear market, traders are increasingly focusing on more ambitious and complex trades. (REUTERS)
    ethereum
    With coin prices having dropped in the current bear market, traders are increasingly focusing on more ambitious and complex trades. (REUTERS)

    When the Ethereum blockchain undergoes its next major upgrade, some key participants will likely see fees decline while they'll remain the same for other users of the most commercially important cryptocurrency network.

    The so-called Shanghai software update projected for next year is expected to give users who pledge, or stake, the network's native Ether cryptocurrency the ability to free up their coins at some point from special digital wallets used to order transactions on the network. But a number of other small changes are being tucked in with this main one. One of them, called WARM Coinbase -- which has nothing to do with crypto exchange Coinbase Global -- will dramatically reduce some fees paid by major ecosystem participants called builders, who already hold a lot of sway over Ethereum.

    Builders such as Flashbots and BloXroute package transactions that are sent on Ethereum into blocks, which are then relayed to validators that order them into the blockchain. Currently, Flashbots relays more than 81% of such block, according to data tracker mevboost.org. Flashbots is also the biggest builder, raising concern among some observers that it could use its power to seek out an advantage or to claim more fees.

    Since September, when the new system using builders went into effect under an upgrade known as the Merge, 88% of validators have opted into working with the builders, to get extra fees from traders trying to perform a variety of lucrative strategies, according to data tracker mevboost.org. The builders get paid to package transactions in a certain order, which might allow a trader to, for example, buy a coin ahead of someone else and to resell it to them for a higher price.

    One of the justifications for the WARM Coinbase change is that it should help improve economics of the builders' business. After it's implemented, some fees builders pay to the network could become 26 times lower, said Matt Nelson, a product manager at ConsenSys, an Ethereum infrastructure provider.

    Certain users like builders need to access a special blockchain software dubbed coinbase that's used to receive new tokens on the network and is basically a connection to validators. Every such transaction may need to interact with the coinbase multiple times. The first time it accesses the coinbase, it costs more to “warm” the coinbase up, hence the name. Once it's warmed up, it costs less to access it thereafter in memory. With this change, coinbase starts off warm, and is loaded into memory for a much lower so-called gas fee up front.

    “Transactions who did this will save a bit of gas, but it's a marginal saving,” said Tim Beiko, who coordinates Ethereum developers. “The main reason to do it is that it was an oversight to not consider the coinbase address ‘warm'” when Ethereum implemented another update months ago.

    That could mean major savings for the traders using builders. William Morriss, who proposed the WARM Coinbase change and owns a trading company that uses builders, said the change would mean that he won't then have to pay network fees for transactions that don't succeed, for whatever reason. While the fees can be small, they do add up.

    “You only pay a network fee if your transaction succeeds,” Morriss said. “This is what everyone should prefer.” Another trader who executes complex trades using builders, Nathan Worsley, said high-volume traders may be able to save “100K or more” a year thanks to this change.

    With coin prices having dropped in the current bear market, traders are increasingly focusing on more ambitious and complex trades that builders can help with to make a buck.

    Flashbots didn't return a request for comment. The value of the change “would mostly (probably 90%) go to the validators,” said Uri Klarman, chief executive officer of BloXroute.

    Many industry insiders believe the change simply makes sense, and should have been implemented months ago.

    “The view is this operation is overpriced,” Nelson said.

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    First Published Date: 07 Nov, 00:27 IST
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