Opinion: Ethereum transaction fee market bubble warning, transaction fees are becoming a burden that users cannot bear

Source/LongHash

After a major bear market, Ethereum has become popular again. The Ethereum blockchain has seen strong growth in active users and daily transaction volume, driven by a combination of factors including a rebound in ETH prices and the adoption of so-called “decentralized finance” (DeFi).

As usage has surged, transaction fees have risen accordingly, and have now reached levels not seen in years. According to ETH Gas Station, while the fee for transferring ETH between wallets is only $0.1 (as of July 3), the cost of interacting with decentralized applications is quite high — which analysts believe is a threat to Ethereum’s viability.

Although miners have implemented a potentially risky short-term solution, transaction fees remain high. A more stable long-term solution needs to be found to ensure Ethereum’s viability.

In fact, one entrepreneur in the industry even said that if Ethereum’s transaction fees remain high, it may be dethroned by other smart contract blockchains.

DeFi, stablecoin growth coincides with surge in Ethereum transaction costs

In 2017 and 2018, Ethereum seemed to have one main purpose: it was a platform that allowed entrepreneurs to launch ICOs. Since the ICO boom collapsed, decentralized finance has successfully filled the void and become Ethereum’s main use case.

Simply put, DeFi is a market segment in the cryptocurrency space where developers attempt to migrate traditional financial services to a decentralized framework.

Thanks to an existing user base, relatively simple coding language, and network effects, decentralized finance has found a home on Ethereum. Major DeFi representatives Compound, MakerDAO, Synthetix, and Kyber Network are all developed on Ethereum. Stablecoins such as USDC and USDT are also based on Ethereum.

As DeFi adoption grows strongly and billions of dollars worth of stablecoins are issued on Ethereum, the Ethereum network has naturally expanded.

Blockchain analytics firm Santiment reported on June 23 that there are now more than 100,000 new ETH addresses every day, while Etherscan reported that there have been about 1 million confirmed Ethereum transactions per day since June 22. Such a sustained high volume has not been seen since the peak of the 2017 and 2018 bubble.

Growth is certainly welcome, and the growth in Ethereum active user accounts and use cases is healthy. However, it has also led to a predictable surge in transaction costs.

Just like Bitcoin, the cost of sending data on Ethereum (i.e. sending ETH, interacting with smart contracts, etc.) is determined by the supply and demand dynamics on the free market: the higher the demand, the higher the cost.

Bitcoin's billing unit is satoshi/byte, and Ethereum also has gwei/gas. 1 satoshi is equal to one hundred millionth of BTC, and 1 gwei is equal to one billionth of ETH.

Due to the recent surge in transaction demand, the amount of gwei that Ethereum users are willing to pay for transactions has reached an incredible level.

TradeBlock, a blockchain analytics and data services provider, reported that Ethereum gas costs reached as high as 125 gwei on several days in mid-June. According to the company’s data, this is the highest gas cost in more than three years.

If the cost is 125 gwei and the ETH price is $225, then most interactions with Ethereum become an unsustainable solution:

● Sending ETH to other addresses requires 21,000 gas and costs $0.59;

● Sending 1 ERC-20 token such as USDT requires 52146 gas and costs $1.46;

● Saving cryptocurrencies in Compound, the most popular DeFi application, requires 200,000-400,000 gas and costs up to $5;

● Trading on the decentralized liquidity protocol Kyber Network requires 500,000+ gas, which can cost up to $10;

Transaction fees are becoming an unbearable burden for users

Even if the high transaction fee of 125 gwei is just a flash in the pan, gas costs will remain high for a few days.

The chart below shows the total daily transaction fees paid on Ethereum (denominated in ETH).

Data shows that miners have earned more than 2,500 ETH per day through transaction fees in the past month or so since the Ethereum blockchain went online in 2015. The transaction fee of 2,500 ETH is far lower than the highest record ever, but this is the longest period of high transaction fees that Ethereum users have experienced.

Additionally, as of July 1, the average gas fee on Ethereum was 47.36 gwei, according to Etherscan.

The high cost of sending transactions is also confirmed by an anecdote.

Kevin Beardsley, head of business development at Kraken Futures, said in June:

“To lock my $15 in @CurveFinance, I’ve spent $14 in gas. I can make $0.079 per week from $SNX earnings. It only takes 177 weeks to break even! (This doesn’t include gas to close the position.)”

Qiao Wang, Messari’s former head of product, echoed this frustration. He spent $10 to interact with a DeFi smart contract. The analyst wrote:

“As long as Ethereum 2.0 is not fully launched, a highly scalable blockchain has a clear chance to dethrone Ethereum and replace it. $10 transaction fees and 15 second settlement delays show that this is just a bad UX.”

Since each DeFi transaction can cost several dollars, relatively small investors and Ethereum users, as well as tokens built on Ethereum, are under pressure from high transaction fees. For an individual, if it costs $5 to get $100 worth of ETH, it seems pointless to continue trading. The same is true for larger transactions.

Short-term solutions didn’t work

Transaction fees remain high despite Ethereum miners voting to increase the gas limit per block from 10,000,000 to 12,500,000. The proposal was successfully voted on and passed on June 19, giving the network greater transaction capacity. (Also, the gas cap was temporarily set at 12 million, most likely to ensure network stability.)

This short-term solution clearly didn’t work when gas fees remained high and users were furious about the inefficiency of Ethereum transactions.

Worse still, some commentators have suggested that raising the gas limit on Ethereum blocks is a dangerous thing to do.

Péter Szilágyi, a team leader at the Ethereum Foundation, said after the vote: “Ethereum miners don’t care about the long-term health of the network or DoS attacks.”

Anthony Sassano, a web writer for "The Daily Gwei," further broke down these concerns in the June 22 edition of his newsletter.

Since the gas limit basically represents the amount of data that can be sent to miners and processed, an increase in this parameter will put pressure on miners. Miners with weaker mining machines or poor network connections may process blocks more slowly and be more vulnerable to denial of service attacks, and therefore have to spend more time storing data on the Ethereum blockchain.

Given the current situation, these concerns are theoretical: Ethereum is still processing blocks without much difficulty. The point Sassano, Szilágyi and others are trying to make is that the change will increase the risk to miners’ health.

What are the solutions?

When miners choose an Ethereum transaction fee solution that does not fully work and brings potential risks, what long-term and more secure solutions do we have?

The first is Ethereum Improvement Protocol 1559 (EIP-1559), written by Ethereum founder Vitalik Buterin and other developers in the industry. The protocol proposes a system that will eliminate the "inefficient" and unstable auction model currently used to determine transaction fees. EIP-1559 will also abolish the right of miners to modify the gas limit; accordingly, adjustments to the gas limit will be achieved through a hard fork.

The second solution is the second layer expansion solution. Just like Bitcoin has the Lightning Network, developers on Ethereum are also working hard to use the second layer security network to relieve the transaction pressure on the main network. Such systems can achieve faster transactions, lower transaction fees, and greater potential security and privacy. Some of the second layer solutions for Ethereum include Skale Network, OmiseGo, Starkware, and MATIC Network. Although few of these solutions have achieved mainstream adoption, many still believe that these solutions are crucial to Ethereum's expansion.

The final option is Ethereum 2.0 — a comprehensive upgrade to the Ethereum blockchain that will fundamentally change the way the network operates. The upgrade has been in development for several years and is expected to greatly increase the number of transactions Ethereum can handle, thereby reducing fees and improving usability.

According to the developers responsible for programming and integrating Ethereum 2.0, the first phase of this upgrade is expected to go live in 2020. This was also confirmed by the blockchain’s founder Vitalik Buterin himself. Unfortunately for those who are worried about high transaction fees, the first phase is expected to activate only a small part of Ethereum 2.0’s technology.

This will greatly alleviate the current upgrade of transaction fees, and it will take more than a year to be fully launched. Some even think it will take longer. BitMEX Research once proposed:

“Ethereum 2.0 is incredibly complex. With so many committees, shards, and vote types, it seems natural that this upgrade will go awry and cause major delays.”

LongHash, understand blockchain with data.