Is it true that lower gas fees are better?

Original title: "How high do we want gas fees to be on Ethereum?"

Original author: mhonkasalo

For ETH holders, high gas fees are a double-edged sword:

The upside is: high fees mean a high P/E ratio, which brings more returns to stakers and puts deflationary pressure on ETH supply.

The downside: the user experience will be terrible because users will be forced to pay three-digit gas for Uniswap transactions.

The ideal goal of ETH is to avoid overly expensive transaction fees while generating fees, which is difficult on Layer 1 public chains (such as Ethereum) because fees increase very quickly once the block space is filled. Before the blocks are filled, transactions are essentially free, and once they are filled, user bids quickly increase everyone's fees.

In the current market, most people believe that trading demand has fallen off a cliff, as the average transaction cost is currently about 1/20 of what it was during the peak of the bull market. However, it would be incorrect to view this as a 95% drop in trading demand.

Because of this dynamic where fees can easily spike, Ethereum doesn’t generate a ton of fees (and other L1 chains today barely generate any fees).

The best options for Ethereum are probably:

1. The second layer network, or L2, starts to take a larger share of L1 fees. This will mean moving from the current 2% of Gas consumed by L2 to the 25-30% range.

2. Due to whale activity, “legacy” applications on L1 continue to incur large amounts of fees.

3. In terms of absolute transaction volume and number of users, L2 quickly surpassed Ethereum L1.

All of this guarantees that even if demand surges beyond what we saw in previous bull runs, Ethereum fees will remain stable at 30-40 gwei and slightly deflationary. Anything above this mark would indicate that L2s are likely “not done with their work” and we would see a significant increase in L1 market share competing with Ethereum.

In the dynamic relationship just described, ETH stakers will receive an actual yield of about 3-4%. It comes from:

1. Dilution of non-staked ETH to 1% (this will be significantly reduced to these levels over time).

2. MEV, 1% (may be higher).

3. Tips: 1-2%.

What I want to express is:

1. If the ETH P/E ratio becomes too attractive, it is bearish for Ethereum because it means that L2 has not yet let users get started.

2. L2 should ensure a "reasonable" Gas level at all times, but "legacy" application activities on L1 will keep ETH deflationary.

3. Due to these factors, the actual yield for ETH stakers "should not" exceed 3-4% for a long time. Ultimately, if this technology succeeds, demand will always exceed block space supply.

Ideally, this dynamic would look like this over time: