Gas exceeds the limit, Ethereum is in crisis

In the past two months, a new round of DeFi craze has emerged, the congestion on the Ethereum chain has intensified, and the gas fee consumed for a transaction on Uniswap has reached more than 20 to 200 US dollars.

On February 28, OKLink data showed that the number of unconfirmed transactions on the Ethereum network reached 106,800. A transaction on Uniswap required a gas fee of about 0.013 ETH, about US$20, or 130 yuan.

On that day, ETH fell to $1,330, making the gas fee level much lower than a few days ago. On February 23, the average daily gas fee of Ethereum reached 431.97Gwei, a record high for the year. On that day, a transaction on Uniswap required a gas fee of more than $200.

Ethereum is in a dilemma. The expansion of DeFi applications is good for Ethereum, pushing up the price of the underlying token ETH. However, a high ETH price will increase the gas fee, which in turn restricts the development of applications. In the past week, the total locked value of Ethereum DeFi protocols fell from US$55.3 billion to US$46.5 billion, a decrease of 15.9%. The 24-hour trading volume of all Ethereum DEXs fell from US$5.059 billion to US$2.139 billion in 5 days, a drop of more than half.

At this time, BSC and Heco Chain, launched by crypto asset exchanges Binance and Huobi , took advantage of the situation and took over some of the lost funds of Ethereum. Data shows that on February 28, the 24-hour trading volume of MDEX, a decentralized exchange on the Heco chain, reached US$3.224 billion, exceeding the total trading volume of all Ethereum DEXs on that day. PancakeSwap on BSC led Uniswap with a 24-hour trading volume of US$875 million.

"Excessive" gas fees have become a problem that Ethereum cannot ignore, and many users pin their hopes on the EIP-1559 proposal for a solution. This proposal was proposed by Ethereum founder Vitalik in 2018, and one of its important directions is to establish an algorithm fee model. The current auction mechanism of "the higher the gas fee, the sooner it will be packaged by miners" will be replaced by a fee mechanism of "basic fee + tip". Some Ethereum developers believe that this will reduce the handling fees of the Ethereum network.

However, since EIP-1559 will harm the interests of miners, this proposal has been resisted by many mining pools. Ethereum's road to escape has also been full of twists and turns.

Gas fees remain high and Ethereum on-chain data declines

High gas fees are becoming the primary obstacle to the development of the Ethereum ecosystem.

In August last year, during the first wave of Ethereum DeFi, it cost about $3 to $10 in gas fees to make a transaction on Uniswap. In the past two months, a new round of DeFi craze has emerged, and the congestion on the Ethereum chain has intensified. The gas fee consumed for a transaction on Uniswap has reached more than $20 to $200.

According to OKEx data, the average daily gas fee on the Ethereum chain has been rising since 2021. On February 23, the average daily gas fee on Ethereum reached 431.97 Gwei, the highest point of the year. Gwei is the unit of measurement for Ethereum's gas fee, and 1ETH is equivalent to 10⁹ Gwei. On February 23, when Fengchao Finance tried to exchange USDT and ETH on Uniswap, the wallet recommended a gas fee of 0.13ETH, which was worth about US$218.

Ethereum’s daily average gas fee has continued to rise in recent months

The high gas fee of Ethereum is not only due to the congestion on the chain, but also related to the rise in the price of Ethereum. On September 2, 2020, the average daily gas fee of Ethereum reached 514 Gwei, the highest point since 2017. But at that time, the price of ETH was $480, and the gas fee was not as exaggerated as it is now.

Since the gas consumed when transferring, trading or calling smart contracts on Ethereum is ETH rather than stablecoins such as USDT, the increase in ETH prices will inevitably lead to an increase in gas fees. Although the entire crypto asset market has begun to pull back in recent days, with the price of ETH falling from $2,040 to $1,330, even the low price is nearly three times higher than the price of ETH at the peak of DeFi last year.

There are voices in the market saying that the rising price of Ethereum is hindering the development of Ethereum's on-chain ecology. Before the performance problem is solved, Ethereum seems to be caught in an intractable contradiction: the accelerated development of on-chain DeFi will push up the price of ETH, and the higher price of ETH will lead to higher gas fees, thus undermining the enthusiasm of users to participate in Ethereum on-chain applications. Faced with high gas fees, traffic will flee with funds.

The overall decline in data on the Ethereum chain is confirming this judgment, not to mention the unfavorable overall market conditions.

According to OKLink data, from February 21 to February 28, the total locked value (TVL) of Ethereum DeFi protocols fell from US$55.3 billion to US$46.5 billion, a decrease of 15.9% in one week.

Ethereum’s top ten TVL projects all suffered capital outflows

Except for WBTC, a synthetic asset pegged to BTC, all the top ten projects in terms of TVL suffered capital outflows within 7 days, and the TVL of most projects shrunk by more than 20%.

USDT on-chain circulation, one of the most important application scenarios of Ethereum, has also been overtaken by the Tron blockchain. According to CoinDesk on January 21, the number of USDT transactions on the Tron blockchain has exceeded that of Ethereum for several consecutive weeks. Data shows that in January, the number of USDT transactions on Ethereum remained stable at around 1.5 million per week. However, on Tron, the number of USDT transactions per week has increased from about 900,000 in mid-December last year to nearly 2 million in mid-January.

Exchanges and public chains share the pie, Ethereum hopes EIP-1559 will help it out of trouble

Ethereum’s “excessive” gas fee means that applications on the chain that require high-frequency transfers have been greatly impacted. Undoubtedly, decentralized exchanges (DEX) such as Uniswap are the first to bear the brunt.

According to OKLink data, between February 23 and February 28, the 24-hour trading volume of all DEXs on Ethereum decreased from US$5.059 billion to US$2.139 billion. In just 5 days, Ethereum DEX trading volume fell by 57.7%.

Ethereum DEX overall transaction volume fell 57.7% in the past 5 days

At this time, Huobi's ecological chain Heco and Binance Smart Chain BSC took away part of Ethereum's cake during this period due to their lower gas fees and faster transfer speeds.

On February 28, data from MDEX, the largest decentralized exchange in the Heco chain, showed that its 24-hour trading volume reached US$3.224 billion, and the trading volume of a single DEX exceeded the total trading volume of all DEXs on Ethereum that day.

According to data from DeFiBox, the total locked value of the Heco on-chain protocol has continued to increase over the past week, from US$5.1 billion on February 22 to US$6.22 billion on February 28.

The largest DEX PancakeSwap on BSC had a 24-hour trading volume of $875 million on February 28, which also exceeded the 24-hour trading volume of $789 million on Uniswap on the same day. On that day, the TVL of DeFi protocols on BSC was $8.317 billion, an increase of 909% from $8.24 at the beginning of the month.

During the period when Ethereum's gas fee was high, the blockchain networks launched by exchanges took over part of the funds flowing out of Ethereum, and Ethereum's position as the king of public chains was shaken.

There is no doubt that high gas fees have become a problem that Ethereum must solve. However, Ethereum 2.0 is still in its early stages of development, and the complete transformation of the PoS mechanism is still a long way off. The Ethereum community and developers can only make improvements based on the existing framework.

On February 27, Ethereum founder Vitalik launched the EIP-3298 proposal, which aims to remove the rule that "SELFDESTRUCT (self-destruction) contracts can receive gas fee refund rewards" in the London upgrade.

Previously, in order to shrink the Ethereum state (the collection of contracts and address information stored by nodes) and thus reduce the gas fee level, Ethereum supported users to destroy contracts and return part of the gas fee as a reward. However, in reality, some developers stored gas in contracts when the gas fee was low, and executed "SELFDESTRUCT" when the gas fee was high to arbitrage, which actually aggravated the expansion of the network. Therefore, Vitalik initiated a proposal to remove this rule to "unblock" the network.

In addition to this proposal, the EIP-1559 proposal has attracted more attention from the Ethereum community. This proposal was first proposed by Vitalik in 2018 and is committed to completing four design goals, including avoiding economic abstraction, flexible block design, permanent block subsidies, and establishing an algorithmic fee model. Among them, the algorithmic fee model is regarded as an important means to solve the current gas fee dilemma.

At present, the charging model for transactions on the Ethereum chain is an auction mechanism, where users bid for gas fees, and miners choose to package the highest bidder first. This mechanism has greatly pushed up the price of gas fees. In the algorithmic fee model, users no longer need to manually set gas fees. Wallets compatible with EIP-1559 will automatically set transfer fees. This fee consists of a basic fee and a tip. The basic fee will be destroyed and miners cannot obtain it. The tip will be used as a reward for miners. In addition, in EIP-1559, there is also a design for dynamically scaling block size to reduce network congestion.

Not long ago, EthHub co-founder Eric Conner revealed that EIP-1559 will be implemented this year, and a lot of ETH will be destroyed afterwards. However, because this proposal is detrimental to the interests of miners, EIP-1559 has been resisted by many Ethereum miners and mining pools.

In recent days, Ethereum mining pools such as Spark Pool and Bee Pool have publicly opposed EIP-1559. On February 27, overseas netizens counted that there were 13 mining pools opposing EIP-1559, accounting for 63% of the computing power of the entire network. Of course, there are also supporters. On February 26, F2Pool published an article titled "Standing on the Right Side of History: EIP-1559", expressing support for the EIP-1559 proposal.

Currently, there are huge differences about EIP-1559, and it is still unclear whether the proposal will be officially implemented. However, most users and developers regard EIP-1559 as the key to Ethereum's escape.

"It's time to make some changes." An Ethereum user said on social media that he was fed up with paying hundreds of dollars in gas fees for a transaction. If this problem is not solved within a year, Ethereum's status will seriously decline.