ETH fees finally plummeted, but projects such as EOS have already taken advantage of the situation to grab the DeFi market

If there’s one good thing that has come out of the ETH price crash in recent days, it’s that transaction fees on the Ethereum network have finally plummeted.

According to QKL123 data, the average transaction fee for Ethereum reached $14.5 last Wednesday, the highest average cost of Ethereum transactions since 2018, and a 7,000% increase compared to the beginning of this year, when the DeFi boom had not yet arrived.

But then, ETH fell from $487 on Wednesday to a low of $320 on Saturday, a drop of 34%. At the same time, the average transaction fee of the ETH network also fell. As of September 6, the average transaction fee had fallen to $3.35.

It is worth noting that the collapse of ETH seems to be in line with the trend curve of transaction fees, but the price of ETH lags behind the transaction fees in terms of time. The average transaction fee of Ethereum fell to $6.1 on September 4, then rebounded to $7.5 on September 5, and then fell to $3.35 on September 6. The price of ETH has been falling today, hitting a low of $312 in the morning of September 6, and then began to rebound to above $350 on the 6th. Does this mean that the price of ETH will continue to fall in the short term?

The reason why Ethereum network fees have risen so high is partly due to the increase in activity on Ethereum. Since the rise of DeFi (i.e. decentralized finance) this summer, people's interest in DeFi tokens has continued to grow, and hundreds of millions of dollars of crypto assets have been invested in DeFi projects. The total locked value of the DeFi ecosystem exceeded $12 billion at its peak recently, mainly driven by the liquidity mining craze, which also led to a record high average ETH fee.

With almost all major DeFi protocols running on Ethereum today, there has been an increase in transaction activity, which in turn has driven up transaction fees.

However, due to the increase in Ethereum network activity, not only has the transaction fee increased, but its network utilization rate has also hovered around 96%. If the utilization rate is higher, the network will be blocked and unusable. Many expansion solutions are still under development, such as Ethereum 2.0, which will implement a network upgrade and greatly increase its capacity. This upgrade is expected to be launched later this year.

High transaction fees greatly limit the development of DeFi applications

DeFi projects and the liquidity mining boom they bring are the main factors that keep transaction fees high at present. Liquidity farmers need to pay Ethereum fees for transactions such as transferring funds in and out of token pools. The increase in the number of people participating in mining leads to more transactions and slower transaction confirmation times, which inevitably increases fees.

The high transaction fees have discouraged many ordinary users from adopting DeFi. Whether it is participating in liquidity mining or trading on DEXs such as Uniswap, it is difficult for ordinary users to participate. For a while, DeFi and liquidity mining became "exclusive to big players", and the early high returns of liquidity mining were also irrelevant to ordinary users.

High transaction fees also make it difficult for many DeFi projects to start. Some DeFi projects have been forced to suspend transactions while waiting for gas to return to normal levels. For example, on September 5, the recently popular derivative DEX Perpetual Protocol announced that the current high gas fees make it impossible for many users to use Perpetual Protocol, which also makes it difficult for the Perpetual Protocol team to continue to deploy and maintain Perpetual Protocol. Therefore, Perpetual Protocol decided to postpone the mainnet launch indefinitely until the gas fee returns to normal and perp.fifi can run on the second layer solution of Ethereum or its side chain.

High transaction fees give projects like EOS an opportunity to take advantage of the DeFi movement

The popularity of DeFi liquidity mining has made many blockchain projects other than Ethereum "envious", so they are scrambling to follow suit, with EOS and TRON being the most active. On September 4, the EOS ecosystem recently launched its first liquidity mining project, Diamond.finance. Although Diamond.finance has been questioned for many problems from the beginning, it is still difficult to stop liquidity mining participants. The project locked up 8 million EOS in less than 1 day. As of press time, 15 million EOS have been locked up. The reason why projects such as EOS can grab a place in the DeFi liquidity mining movement is entirely due to the high transaction fees of Ethereum. Compared with Ethereum's liquidity mining, which is not friendly to ordinary users, the liquidity mining of ecosystems such as EOS and TRON can almost achieve zero cost participation, and ordinary users only need to pay a small transaction fee to participate.

How can Ethereum overcome high transaction fees?

Ethereum founder Vitalik Buterin recently shared his stance on solving the transaction fee issue.

First, he noted that increasing the Ethereum block size is not a short-term solution due to the security risks of block broadcasting and the efficiency of nodes:

“However, it is difficult to safely increase the capacity of the network. Ethereum nodes are already operating close to their limits and are at risk of DoS attacks, processing transactions much slower than regular blocks, slowing down the network. Higher gas limits would exacerbate this.”

Buterin believes that a viable short-term solution is a new Ethereum Improvement Proposal, BIP2929, which "will increase the gas cost of certain particularly sensitive operations, making it safer to raise the gas limit." He believes that this is only a short-term solution that can reduce transaction costs by about 25%.

The medium-term solution he’s eyeing is a technology called “Rollup,” essentially Bitcoin’s equivalent of Lightning Network.

“In an ecosystem with a lot of Rollups, on-chain gas remains constant, and even 465 gwei may become the standard, but most transactions will be conducted within Rollups, and the actual fees paid by users will be hundreds of times lower.”

As for long-term solutions, Ethereum 2.0’s sharding technology will increase “capacity at the base layer by 100 times,” which will reduce fees by tens of percent.

“The only solution to high transaction fees is scaling. Tether, Gitcoin, and others are doing the right thing by migrating to ZK Rollup today. I’m excited about the upcoming Optimistic Rollup, which will generalize Rollup extensions to full EVM contracts.”

Regardless, high transaction fees are hurting the adoption and further development of DeFi applications, but as Vitalik Buterin said, “Until rollups and sharding are completed, ETH has no choice but to endure high transaction fees.”

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