Wang Chuan: Why is the fee of Ethereum so high?

This article is a sequel to Wang Chuan: Decentralized Liquidity Black Hole, and the First Law of Blockchain and Wang Chuan: Why are Bitcoin payment fees so high?

1/ Ethereum is the second largest public blockchain in terms of market capitalization after Bitcoin. More than one million transactions are generated on the Ethereum network every day. The average daily transaction fee on the chain has exceeded 30 million US dollars in the past seven days (the corresponding data for Bitcoin is 8 million), and the average daily liquidation amount on the chain has exceeded 9 billion US dollars in the past 30 days.

2/ Different operations on the Ethereum network have different data transmission sizes and different consumption costs. The transaction fee calculation of Ethereum is mainly obtained by multiplying two concepts, one is the gas price, and the other is the gas limit. The multiplication of the two will give the transaction fee in "Ether".

3/ The gas price unit is gwei, which is equivalent to one billionth of an ether (ten to the negative ninth power). The gas limit is 21,000 for the simplest operation of sending ether, and several times higher for more complex operations, especially those involving smart contracts. The total gas limit of all transactions in each block is also capped, which currently cannot exceed 12.5 million (so each block on Ethereum can theoretically only have 595 transactions at most), similar to the block size limit of Bitcoin.

4/ Gas price changes dynamically with the degree of network congestion. Before 2020, it was below 20 gwei most of the time. In the first half of 2020, before DeFi became popular, it was below 50 gwei most of the time. After entering 2021, as more people join in, the price can exceed 400 gwei during the most crowded times of the day.

5/ The cheapest operation is to send ether (eth). According to the data from etherscan.io on February 24, the current fee is about 0.00294 eth (140 gwei multiplied by 21,000), which is less than five dollars based on the price of ether at $1,600.

6/ If you want to transfer erc20 token, because it involves more data reading, writing and calculation, the fee is generally at least three times higher, currently about fifteen US dollars.

7/ If you want to use smart contracts such as Uniswap to trade and exchange for other tokens, it will be more complicated. Currently, the Ethereum gas fee for a transaction is more than ten times that of basic operations, ranging from US$40-70.

8/ Uniswap, 1inchexhcange, sushiswap, balancer and other smart contracts that match token transactions consume more than 20% of the traffic on the network and are one of the most important reasons for the current congestion and high fees on the Ethereum network.

9/ You can think of Uniswap and other smart contracts as a completely open free trade port for international traders to do business. But the difference is that you don’t have to carry large bags, sleep in the open, and go through all the barriers to do business like in the past. There is no pain of traveling around the world, no challenges of inventory and capital turnover. Basically, you can complete the operation by clicking the mouse at home, and get the confirmation of liquidation within a few minutes.

10/ From this perspective, the $70 gas fee is not expensive. If you think it is expensive, it is because your business is too small. If everyone thinks it is expensive, they will not do it again after the last time. But why are there so many other people who continue to carry out various operations every day and bear hundreds of dollars in single transaction fees? Are they doing charity, losing money to gain publicity, or making a fortune in silence?
Please refer to my old article Wang Chuan: The perspective of those who pay the most is the perspective of God

11/ The first thing you need to understand is that gas fees are not fixed, but change dynamically. If the fees temporarily increase, this is a signal from the market to everyone: our demand is too strong, please come and meet our needs!

12/ When prices rise, big investors are usually indifferent. After all, it is these big investors who are ruthless and don’t talk much who are really driving prices up. The loudest complaints are often from small investors, “ Ethereum is too crowded, no one uses it! The housing prices here are too expensive, no one lives here! ” Then they will look for the solution with the least resistance to reduce pain.

13/ At this time, if a centralized exchange also does blockchain, at the expense of decentralization, provides extremely low transaction fees, and at the same time copies all the new application codes and tools on Ethereum at almost zero cost, packaging itself as an Ethereum killer, it will be very tempting for small investors who want to save money. Because in the short term, mining does seem to make some money. Regardless of whether it can be profitable in the end, at least it does not have to pay tens or hundreds of dollars in painful transaction fees like on Ethereum.

14/ Although there is the overflow of Ethereum traffic and the support of centralized exchanges, this type of centralized spare tire chain with only more than 20 full nodes is still substantially different from Ethereum in terms of ecological complexity and liquidity depth. If it is found fault by the China Securities Regulatory Commission like Ripple (XRP), it may face the risk of a sudden drop in traffic.

15/ Smart contracts on truly decentralized platforms, such as Uniswap, cannot be blocked. Hayden Adams, the founder of Uniswap, once said that even if regulators asked him to shut down Uniswap one day, he would shout to all users, "Don't use Uniswap!" It would be useless.

Uniswap V2: Router 2 at the address 0x7a250d5630B4cF539739dF2C5dAcb4c659F2488D is essentially a row of codes that cannot be tampered with by anyone, including the original author.

16/ As a copycat of Ethereum, the ecological complexity is always lacking compared to Ethereum. The connotation of ecological complexity here includes: various token assets on the chain, wrapped BTC, various smart contracts, various software development tools, liquidity depth, developer community, etc., all of which are indispensable. No matter how low the transaction fee is, if the ecological complexity is low, some things cannot be done at all. It's like no matter how good the air is in the countryside and how cheap the price is, when you are sick and need a major operation, you still have to go back to the big hospital in the city center . When the transaction fee of the Ethereum main chain drops periodically and new opportunities reappear, the profit-seeking traffic will still return to the Ethereum main chain at any time.

17/ The solution to the reduction of Bitcoin network fees in the past was largely due to the change of currency transfers between exchanges to batch processing, which is equivalent to dozens of people riding a bus together. However, batch processing on Ethereum is not that simple. To send multiple different tokens to different addresses, smart contracts must be used. Smart contracts are more complex than ordinary transactions and consume several times more gas. In many cases, they cannot really save costs. Batch processing is even more complicated for smart contracts involving automated market maker transactions.

18/ Rollup is essentially a new batch processing technology on Ethereum. It is the second-layer solution with the most promising effective expansion before the actual deployment of Ethereum 2.0 sharding technology (Ethereum mainnet is equivalent to the first layer). In theory, it can reduce the gas fee consumed by a single transaction to less than 1% of the original. Rollup is divided into two styles: optimistic rollup, which is simpler to implement technically, because you get on the bus first and then check the ticket, but you need to wait a week to withdraw the coins to the main chain; zk rollup, which is more complex to implement technically, but you can withdraw the coins immediately without waiting.

19/ Various rollup projects have emerged over the past two years. It is still difficult to say which one will have a substantial impact on the scalability of the Ethereum mainnet, whether various wallet software can quickly integrate the new features of new projects, and how much of the propaganda in various white papers can be realized. The following are some of the more high-profile projects in the industry.

- Optimism: A16z, a well-known venture capital company, invested 25 million US dollars last year. In mid-January, it started the so-called soft launch on the Ethereum mainnet and cooperated with Synthetix, a decentralized exchange for synthetic assets.
- Uniswap v3: It is speculated that it will be launched in the third quarter of this year or even earlier. It is said to adopt the optimistic rollup solution. Because Uniswap exchange has the deepest liquidity, if it is launched, it may be the project with the most hope to quickly reduce the fees of the Ethereum mainnet.
- Polygon: Formerly known as Matic.network, it claims to be an aggregator of various second-layer solutions. The specific launch time is unknown.
- Loopring: An exchange that supports zk-rollup technology launched in March 2020, but the average daily trading volume so far does not exceed 20 million US dollars (original data from coingecko.com)

20/ You can think of projects like rollup as building a subway in a crowded city. Each rollup's second-layer solution is like a subway line built by residents who raise funds on their own initiative. But one line cannot immediately alleviate the traffic congestion of the entire city, and it will take time for the market to verify the acceptance of the rollup project. Different second-layer solutions need to build fast-connecting bridges that do not pass through the main network (cross-rollup transactions), just as underground passages need to be built between different subway lines to facilitate passengers to transfer to different lines . Taking the Shanghai subway system as an example, from 1993 to now, a total of 19 lines have been opened. It can be imagined that various projects on the Ethereum network to improve scalability will be a long-term effort.

21/ If history is any guide, there is no silver bullet solution to the high fees challenge on Ethereum. Before Ethereum 2.0 is successfully deployed, one possible development path is:

-- The spontaneous emergence of a certain second-layer rollup solution has reduced the transaction fees of a certain local link, attracted more traffic into Ethereum, and promoted the complexity of the ecosystem.

-- Because of the influx of new traffic, an application on Ethereum became a new bottleneck, network fees skyrocketed again, and traffic overflowed to other centralized backup public chains.

-- Big investors are making money quietly, small investors are complaining loudly, public opinion is becoming pessimistic again, the market value of the backup public chain is rising (similar to the fact that the increase in suburban housing prices exceeds the increase in city center housing prices at a certain period of time), and they are packaging themselves as Ethereum killers to attract traffic.

-- New second-layer solutions have emerged on Ethereum, Ethereum fees have fallen, and traffic has returned to Ethereum, further complicating its ecology, and the difference in actual ecological complexity with the backup public chain continues to widen.

22/ The fees on the Ethereum network will remain high for a long time compared to other alternative public chains. Just like the housing prices in the center of Shanghai are always higher than those in the suburbs such as Jiading or Fengxian. And in the world, there are always whispers, spreading the legend that "house prices are too expensive and no one lives there".

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About the author: Wang Chuan, an investor, currently living in Silicon Valley, California. WeChat ID: 9935070, Twitter ID: "Svwang1", Sina Weibo: "Silicon Valley Wang Chuan". All articles express the author's personal views for reference only and do not constitute investment advice on the assets mentioned. Investment is risky and investors should be cautious when entering the market.