Where Ethereum Fees Go: Burn, Validators & ETH Supply

Ethereum transaction fees are not simply paid to validators. Since the Ethereum network implemented EIP-1559, every gas fee is split between a burned base fee and a validator tip, directly shaping ETH’s supply, incentives, and long-term monetary policy.

What makes up an Ethereum fee?

An Ethereum transaction fee consists of two core components following the EIP-1559 upgrade implemented in August 2021. First, the base fee, determined algorithmically by the network based on block congestion, which automatically adjusts up to 12.5% per block depending on network demand. This base fee is burned, removing it from circulation. Second, the priority fee (or tip), an optional payment users can add to expedite transaction processing, which goes directly to validators.

Users also set a max fee per gas as the absolute maximum they'll pay. The total fee equals gas used multiplied by the sum of base fee and priority fee. Fees are denominated in gwei, where 1 gwei equals 0.000000001 ETH, making fee calculations more manageable for users navigating the network.

Where do Ethereum fees go after a transaction?

Ethereum transaction fees follow a dual-path distribution system established by EIP-1559. The base fee component is burned, permanently removing it from circulation rather than being paid to anyone. The more transactions on Ethereum, the more ETH gets burned, which directly reduces the total ETH supply over time. This burning mechanism has transformed Ethereum's economic model significantly.

Meanwhile, the priority fee (or tip) takes a completely different route. Validators receive these tips as a direct reward for including transactions in blocks. The validator receives the tip while the base fee is burned. During periods of high network activity, the burn rate can top thousands of ETH per hour. This split creates a unique economic dynamic where network usage simultaneously rewards validators while making ETH more scarce through the burning process, fundamentally changing Ethereum's supply economics.

How does EIP-1559 split and burn fees?

EIP-1559 splits transaction fees into two components: a base fee and a tip. The base fee represents a mandatory, algorithmically determined fee calculated by the network based on congestion. When network usage exceeds 50% capacity, the base fee automatically increases; if usage falls below 50%, it decreases. This dynamic adjustment happens block by block, creating predictable pricing.

The critical innovation lies in fee distribution. The base fee is burned, permanently removing it from circulation, while only the priority tip goes to validators. Before EIP-1559, miners received 100% of all transaction fees, but the upgrade fundamentally changed this model. The base fee burn ensures only ETH can pay for transactions on Ethereum, cementing ETH's economic value within the platform. During high-activity periods like major NFT drops or DeFi rallies, burned ETH often exceeds new validator issuance, making Ethereum deflationary.

How do validators earn from fees and tips?

Validators earn rewards through multiple income streams when selected as block proposers. Users attach priority fees (tips) to their transactions to encourage inclusion, and the validator collects these tips directly. The priority fee incentivizes validators to maximize the number of transactions in a block, creating competitive inclusion mechanisms.

Beyond basic tips, validators can significantly boost earnings through MEV-Boost, an optional software connecting them to specialized block builders. Validators running MEV-Boost maximize their staking reward by selling their blockspace to an open market, and it is estimated that validators can increase staking rewards by over 60%. Block proposers receive the sum of all priority fees within the block that they propose, plus MEV payments. Rewards for being a block proposer far outweigh the collective rewards from simple voting and sync committee participation, making block proposals the most lucrative validator activity. Execution layer rewards are delivered directly to an Ethereum address specified by the validator operator.

Why does Ethereum burn the base fee?

Ethereum burns the base fee to achieve multiple critical economic and security objectives. The burn ensures that only ETH can ever be used to pay for transactions on Ethereum, cementing the economic value of ETH within the Ethereum platform and reducing risks associated with miner extractable value. Removing ETH from the supply increases the value of every ether still in circulation, and fee-burning can be viewed as a lump-sum refund to ETH holders, similar to stock buybacks.

By burning the base fee, Ethereum continuously reduces its total supply, fighting inflation and making each remaining ETH more scarce. This is intended to reduce ether's circulating supply and potentially drive up the value of the coin by increasing scarcity over time. Ensuring the miner of a block does not receive the base fee is important because it removes the miner's incentive to manipulate the fee in order to extract more fees from users, promoting network security and fairness.

How do fees affect ETH supply and price?

Transaction fees directly influence ETH's supply dynamics through the burn mechanism. The ETH supply decreases whenever more ETH is destroyed via fee burn than ETH is created via issuance, with fee burn acting as a scarcity engine fueled by Ethereum's transactional utility. During the NFT boom in May 2021, daily burns exceeded 20,000 ETH, with over 2.6 million ETH burned in the first year post-implementation. When combined with reduced Proof-of-Stake issuance, Ethereum can actually shrink in supply, and in the year following The Merge, Ethereum's net supply decreased by roughly 300,000 ETH.

This supply reduction creates deflationary pressure affecting price. According to supply and demand principles, when supply decreases and demand increases, ETH's price can rise. Data indicates that Ethereum's net supply contraction during high-demand periods has correlated with price appreciation. However, after Ethereum's Dencun upgrade in 2024, which reduced Layer 2 fees, the network experienced inflation with a rate reaching 0.74% in September 2024, demonstrating that fee levels directly impact whether ETH remains deflationary.

Conclusion

By burning base fees and redirecting tips to validators, Ethereum transformed transaction fees into a monetary policy tool. Network demand now determines whether ETH becomes inflationary or deflationary, making fees central to Ethereum’s long-term economic design.