With the popularity of DeFi, can the Ethereum network bear its weight?

The number of Ethereum network transactions has more than doubled in 2020 and is now almost on par with its all-time high set in January 2018.

As shown in the chart below, transaction volume has doubled in the past six months to 1.23 million transactions per day.

Ethereum’s 7-day average daily transaction volume. Source: CoinMetrics

This scenario may seem very optimistic at first, but we must remember that both EOS and Tron started out as ERC-20 tokens before launching their own mainnets and running completely independent blockchains.

A similar chain migration is happening with Tether’s USDT, a stablecoin that recently hit a $12 billion market cap.

Tether was created under the OMNI protocol, which runs on the Bitcoin network, and most USDT tokens have been moved to the Ethereum network to avoid increasing Bitcoin (BTC) transaction fees.

Ethereum 7-day average transaction fee Source: BitInfoCharts

As Ethereum fees rose throughout 2019, and indeed over the past year as well, some Tether (USDT) holders have opted for the Tron network.

In July 2019, the median Ethereum transaction fee tripled to $0.14, although that seems insignificant compared to the current $3.

Current Tether USDT balance sheet Source: Tether

The Tron network currently holds half the amount of ERC-20-based USDT, which could increase Tron’s share given the recent spike in Ethereum network fees.

In comparison, in August 2019, the Omni network held the majority of USDT in circulation, while Tron accounted for less than 3% of its market cap.

USDT balance sheet in August 2019 Source: Tether

It is worth highlighting that USDT currently circulates in the EOS, Liquid, Algorand, and Bitcoin Cash SLP networks, albeit on a much smaller scale.

Can the Ethereum Network Survive the Surge in Transaction Fees?

To better assess the likelihood of additional outflows from the Ethereum ecosystem, one should analyze what types of transactions are occurring. For example, stablecoins have little incentive to remain on Ethereum during periods of network constraints.

On the other hand, switching networks on DeFi applications such as Maker (MKR) and Compound (COMP) seems less obvious.

As Cointelegraph reported, competing smart contract platforms have their own shortcomings and a much smaller ecosystem.

Weekly active Ethereum tokens. Source: Etherscan

Etherscan data shows that the use of decentralized finance (DeFi) applications on the Ethereum network is growing, but how sustainable are these numbers given current fee levels?

According to DefiPulse, the total value locked in DeFi has increased fivefold in the past 90 days. While this is astounding, how many Ethereum transactions are related to this number?

Yearn.finance (YFI) transaction amount and quantity Source: Etherscan

According to Etherscan data, Yearn.finance (YFI) averaged 3,400 transactions per day and 15,700 token transfers over the past week.

Considering that the price of YFI was $5,175 during that time, the average value of each transfer was $23,900, which means that the increase of $3 in fees should not be a hindrance.

To determine whether YFI is an outlier, one should analyze Synthetix Network Token (SNX), another DeFi contender among the 20 most active Ethereum contracts.

Synthetix Network Token (SNX) transaction value and volume Source: Etherscan

According to the chart above, SNX had an average of 2,800 transactions per day last week, with 8.3 million tokens transferred. Considering that the price of SNX was $4.70 during this period, the average value of each transaction was $13,900. This once again shows that the increase in Ethereum network fees has not had a significant impact.

What about oracles?

Chainlink (LINK) is the largest token that aims to provide oracle solutions, and although it is interoperable on multiple chains, it is indeed an Ethereum ERC-20 token.

As reported by Cointelegraph, its increased usage appears to be behind LINK’s 88% surge in two weeks.

Chainlink (LINK) transaction value and volume Source: Etherscan

LINK has averaged 35,000 transactions per day over the past week, with 34 million tokens transferred. Considering its price of $13.40 during this period, the average value of each transaction is $13,000.

This analysis is another positive indicator that despite the recent increase in Ethereum network fees, some major oracles and DeFi applications will be able to withstand it, at least for the time being.

Not every smart contract can thrive at current fee levels

Rising fees on the Ethereum network have accelerated the development of second-layer solutions for some DeFi applications.

While the overall impact on Ethereum could be positive, as it could prevent applications from migrating to competing networks, it is certainly not a good thing for investors and the public.

The development of Ethereum 2.0 faces tremendous pressure to provide a network that can better meet the rapidly growing needs of stablecoins, oracles, decentralized exchanges, and DeFi.

The most important question to ask now is, will current Ethereum (ETH) holders and network developers adapt to the current limitations?

The answer to this question may depend on what rival cryptocurrency networks have to offer, so in addition to tracking Ethereum’s price, wise investors would also be wise to keep an eye on the network’s activity.