To Burn or Not to Burn - The Daily Gwei #467
A look at EIP-1559 through a different lens.
Back in the early days of EIP-1559’s development process there were a lot of discussions around directing the base fee revenue to public goods funding instead of burning it. This may sound good in theory but in practice it actually has a lot of negative baggage that comes with it that I believe would’ve lead to a worse off outcome for Ethereum if it was implemented.
The biggest concern around the public goods funding idea was around who would manage the funds - would it be a trusted set of individuals or a DAO? How would the community prevent the funds from being stolen? Remember that since EIP-1559 went live 2.07 million ETH has been burned which is currently worth $7.2 billion - this would’ve been an absolutely massive honeypot and surely would’ve been mismanaged or stolen no matter who was in charge of it. So as you can see, I don’t even need to tryt very hard to show you why it would’ve been a terrible idea to direct the base fee revenue to something like a DAO instead of burning it.
Implementing something like this would’ve also compromised the Ethereum network’s credible neutrality because it would give a bias to the protocol. This is because the protocol itself would be directing the base fee revenue into the hands of a very subjective and human-managed pool of funds which could in-turn be used to do things such as actually bribe core developers to implement certain protocol changes. And as I mentioned above, this pool of funds would be absolutely massive by now which could potentially lead to all types of nastiness.
Another major concern at the same time came from ETH holders who obviously were very in favor of the base fee being burned as it is a pseudo-dividend . On top of this, a higher priced ETH directly leads to more security for the network so to this group of people it was a no-brainer to burn the base fee instead of redirecting it to some group or DAO. Another way to think about it is that by burning ETH, naturally over time the value of the unburned ETH should appreciate which would lead to a more secure network and additional positive outcomes for the ecosystem.
In saying all of this, I think that directing protocol fee revenue is a brilliant idea if it is done at layer 2. Optimism already does this with their promise of directing all their centralized sequencer profits to public goods (with millions already given out) and I’m sure we will see other layer 2 protocols follow suit eventually. This way, we can avoid many of the negative externalities that I outlined above and still get the positives of funding public goods!
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.