With on-chain transaction fees rising, how can EIP-1559, Layer2, and Gas tokens break the deadlock?

After the price of Ethereum broke through its all-time high, the short-lived excitement did not last long, as more people began to realize that the cost of using Ethereum was getting higher and higher. Before the implementation of ETH 2.0 sharding, many people began to seek solutions to improve the current network congestion and high transaction fees.

This article starts with how the cost of each transaction is calculated, and analyzes how mainstream solutions such as Gas tokens, EIP-1559 proposals, and Layer 2 expansion create a better transaction experience for the Ethereum ecosystem.

Author/Loners Liu

Gas fee calculation

In the Ethereum network, whether it is a transfer transaction or the execution of a smart contract, it consumes the computing or storage resources of the entire network. The amount of these resources consumed is called Gas. The transaction fee for each chain depends on the product of Gas Used and Gas Price, and is ultimately settled and paid to Ethereum miners in ETH.

Among them, Gas Used refers to the total amount of Gas actually consumed to execute the operation, which depends on the complexity of the transaction. If it involves calling smart contracts or aggregators, which contain more complex transaction logic, the total amount of Gas required will be greater. For example, the fixed value of Gas Used for ETH transfer transactions is 21,000, and the values ​​of DeFi applications such as Uniswap are mostly above 100,000.

Gas Price refers to the price that users are willing to pay for each Gas consumed, measured in Gwei (1 ETH = 10^9 Gwei). It also depends on network congestion. In case of network congestion, it can be as high as 1000 Gwei, and in times of low transaction volume, it can be as low as 1 Gwei.

The number of transactions that Ethereum can currently process per second can be calculated using the following formula: Transactions per second = Gas Used * Average Block Interval Time

Taking the average block interval of 13.2 seconds, ETH price of 1,200 USD, and Gas Price of 100 Gwei as an example, we can estimate the transaction costs required for various Ethereum transaction types under fast transaction conditions:

As ETH continues to rise, the actual transaction fees paid by users are also rising

Generally speaking, miners will prioritize packing transactions with high gas prices, because this will maximize their profits, and eventually trigger the highest price auction for gas. From the user experience point of view, such an auction mechanism will lead to overpayment in a short period of time in order to compete for resources. This actually reflects the inefficiency of this auction mechanism, and it will also cause some unnecessary delays.

Therefore, Layer2, Gas tokens, EIP-1559 and other solutions have become the three main options for solving the problem of high Ethereum transaction fees.

Gas Token Solution

In Ethereum smart contracts, the consumption of gas fees is determined by the data stored on the chain by the contract. The Gas Token is a tokenized ERC20 token that allows users to buy and sell directly, or use it as a prepayment for future gas usage. Users can purchase and store gas appropriately when the gas price is cheap, and then use it when the gas price rises .

Specifically, when the Gas price is low, Gas tokens encourage users to create or mint tokens GST1/GST2 in contracts. At this time, Gas tokens will use the funds provided by users to store data/create contracts at a lower cost. When the Gas price soars, users can use or consume GST1/GST2, and Gas tokens will obtain network rewards, or gas refunds, by deleting data or contracts, thereby consuming Gas at a lower price.

In June 2020, the aggregation trading platform 1inch released a further optimized Ethereum gas fee token Chi, which users of the platform can use to pay in transactions. "In the same transaction, burning Chi tokens will reduce the transaction fee cost by nearly half." 1inch officials stated.

Description from 1inch official blog

In addition, uLABS's synthetic gas futures token (uGAS) allows gas "users" and "providers" to lock in their costs or benefits. The uGAS token allows users to hedge risks and can also serve as a speculative tool for gas prices. However, Wang Yuanming, co-founder of Grouk, said that u gas is purely a prediction market and a bet on gas prices.

"We expect DeFi teams to begin accumulating gas tokens and use them in their protocols when they need to use built-in liquidation automation procedures during periods of market volatility," Multicoin Capital pointed out in a study.

Layer2 Solution

As can be seen from the previous table, complex contract interactions not only require tens of dollars in transactions, but also consume a lot of Gas. When Ethereum receives more and more complex transactions from applications such as DeFi, the number of transactions that can be processed per second will drop rapidly. Therefore, the demand for on-chain expansion solutions has begun to increase with the prosperity of the DeFi ecosystem. Before the arrival of Ethereum 2.0, users urgently need a product that can solve the high transaction costs and experience costs.

Because of this, the Ethereum Layer 2 track has become eye-catching. When interacting with the Ethereum main chain on the traditional Layer 1, this process requires gas fees. However, when conducting transactions or transfers on the second-layer network, there is actually no interaction with the Ethereum main network, and there is no gas fee and other transaction costs, thereby solving the pain point of high transaction costs.

This operation is ultimately carried out by a validator who will take all user data operations to the Ethereum main chain for verification. The validator does not need to worry about all the user's operations on the second-layer network, but only needs to verify the user's final results with the Ethereum main chain. The advantage is that it can greatly improve the user's transaction experience while saving a lot of costs.

At present, Layer2 solutions mainly include state channels, side chains, and Rollup. Ethereum has also confirmed the 2.0 roadmap centered on Rollup. It can be said that Rollup has become the mainstream technology for Layer2 expansion.

At the same time, leading DeFi players such as Uniswap, Aave, and Synthetix have all begun to explore the feasibility of Layer 2 + DeFi. In the recent 2021 roadmap released by Sushiswap, the official stated that ZK rollups is the priority option for Layer 2. Synthetic uses the Optimistic solution to enable SNX staking on Layer 2. The current staking volume has reached 2.75 million SNX, equivalent to 35 million US dollars.

However, due to the composability of DeFi projects, when project parties choose expansion plans, the correct design plan and trade-offs are not the only considerations. They must also consider the possible options of other projects and optimize them.

Regarding how DeFi projects should consider the Layer2 solution that is suitable for them, Nervos co-founder Lu Guoning told Chain Catcher that projects with different characteristics and businesses will also have different requirements for Layer2. In principle, there are roughly several considerations for the selection of DeFi projects, including security considerations, the urgency of performance improvement, migration costs, and whether the business code needs to be rewritten.

When deciding whether to migrate to Layer 2, another key consideration must be that users cannot be lost. “This is why Ethereum still has a huge ecological advantage even though many public chains may have better performance than Ethereum. Therefore, if users’ usage habits must change after migrating to Layer 2, then Dapp operators will definitely not want to see this,” said Lv Guoning.

In summary, under the Oprimistic Rollup concept, project parties can migrate directly because it is compatible with Ethereum EVM; under the ZK rollups concept, project parties need to redevelop, the migration is difficult, and the supported operations are limited, but the performance is good enough to build a real barrier.

EIP-1559 Proposal

If Layer2 can be seen as a layer of protocol outside Ethereum, and all user operations are actually stored or packaged in the second layer, then Ethereum's EIP-1559 proposal is to give users a more certain gas price and a more flexible gas limit by adjusting the usage rate of Layer1 blocks.

Since last December 21, when Ethereum Foundation developer Eric announced that the EIP-1559 proposal would be implemented, discussions about the proposal have quickly become a hot topic. It has two main goals, the first is to make the Ethereum fee market more efficient, and the second is to improve the user experience when sending transactions.

This proposal has three characteristics. The first is that the Gas Price setting is placed in the protocol to avoid large fluctuations. The second is that the Gas Limit for the entire block will accommodate more transactions than before. The third is that most of the base fee in the entire transaction fee will be destroyed, leaving only a portion of the tip for the miners.

The original gas price is estimated by the wallet based on the usage of past blocks (of course, users can also adjust it manually). In the EIP-1559 proposal, it will be composed of two parts, namely base fee and gas premium, where gas premium can be regarded as a tip for miners or validators.

According to Crypto Vision’s interpretation of the EIP-1559 proposal, in this new proposal, all transactions occurring in a block will include two variables, one is the gas target (target gas usage) and the base fee. The original gas limit (originally fixed at 12,500,000) becomes twice the gas target.

Assuming that all gas usage in a block is less than the gas target, that is, the current gas usage has not reached the gas target, then the protocol will think that the current base fee is too high, causing people to be unwilling to trade, and will reduce the base fee in the next block to encourage more people to trade, increase the gas usage in the block, and make the gas usage of the entire block close to the target usage.

On the other hand, if the sum of all gas used in a block exceeds the gas target, it also satisfies the requirement of being less than twice the gas target, that is, less than the gas limit. In other words, under the current base fee, the gas usage exceeds the target gas usage. This will cause the protocol to adjust to increase the base fee and increase transaction costs.

It can be found that the scheme has increased the original block limit by introducing the gas target, and increased the number of transactions that can be packaged on the basis of the original 1250000 gas limit. At the same time, the scheme also stipulates that the base fee change between two blocks cannot exceed 1/8, so even if the network transaction volume suddenly increases, it will not suddenly cause the base fee to soar.

Of course, if this plan is implemented, the miners’ transaction rewards will only be gas premium, because all base fees will be destroyed after payment, and the interests of miners or validators will actually be greatly damaged.

This also directly led to the recent announcement by the Flexpool mining pool, which officially announced its opposition to the EIP-1559 upgrade and organized Ethereum miners to vote on the EIP-1559 upgrade. The announcement claimed that the EIP-1559 upgrade would not bring any benefits to miners, but would be a form of exploitation of Ethereum miners. Once EIP-1559 is upgraded, Ethereum miners will become slaves, and the ultimate beneficiaries will be Ethereum developers.

From the perspective of supporters, the optimization and upgrade of an ecosystem ultimately depends on whether it is beneficial to users. EIP-1559 is conducive to reducing transaction fees and providing a better user experience, thereby attracting more people into the Ethereum ecosystem. At the same time, the destruction of transaction fees will help Ethereum enter an era of deflation.

References:

《A comprehensive understanding of the six major Ethereum Gas tools》

D1 Ventures: A brief analysis of Ethereum Layer 2 solutions and DeFi expansion options

"Layer2: Second-layer protocol and zero-knowledge proof-what can I use to save you and me from gas fees? "