What are the solutions to the Ethereum transaction fee market bubble?

LongHash Blockchain Information (ID: Kyle Torpey)

, Author: Nick Chong, reproduced by Odaily with authorization.

As usage has exploded, so have transaction fees, now reaching levels not seen in several years. According to ETH Gas Station, although the transaction fee of ETH between different wallets is only US$0.1 (data as of July 3), the interaction cost with decentralized applications is quite high-analysts believe that this is a big problem for Ethereum. Viability is a threat.

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

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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. After the collapse of the ICO boom, decentralized finance has successfully filled the void and become the main use case of Ethereum.

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

Thanks to an established user base, a relatively simple coding language, and network effects, decentralized finance has found a home on Ethereum. The main representatives of DeFi Compound, MakerDAO, Synthetix and Kyber Network are all developed based on Ethereum. The network of choice for stablecoins like USDC and USDT is also Ethereum.

With strong growth in DeFi adoption and billions of dollars worth of stablecoins being issued on Ethereum, the Ethereum network expanded naturally.

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

The growth is certainly gratifying, and the growth of Ethereum active user accounts and available cases is also healthy. However, it 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 supply and demand dynamics in the free market: the higher the demand, the higher the cost.

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

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

• Blockchain analysis and data service provider TradeBlock reported that in a few days in mid-June, the gas cost of Ethereum was as high as 125 gwei. According to the company, 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 unsustainable solutions:

• To send an ERC-20 token such as USDT, the operation requires 52146 gas and costs $1.46;

To trade on Kyber Network, a decentralized liquidity protocol, the operation requires 500,000 + gas, and the cost may be as high as $10;

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Transaction fees are increasingly becoming unbearable for users

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

The graph below shows the total amount of daily transaction fees paid on Ethereum (in ETH terms).

Data shows that since the Ethereum blockchain was launched in 2015, miners have obtained more than 2,500 ETH through transaction fees every day for more than a month. The transaction fee of 2,500 ETH is well below the all-time high, but it is the longest period of high transaction fees that Ethereum users have ever experienced.

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

Kevin Beardsley, head of business development for Kraken’s futures division, said in June:

“As long as Ethereum 2.0 is not fully live, a highly scalable blockchain clearly has the opportunity to dethrone Ethereum from the throne and replace it. The $10 transaction fee and 15 second settlement delay shows that this is nothing more than a bad UX.”

Qiao Wang, the former head of product at Messari, shares this frustration. To interact with a DeFi smart contract, he spent $10. The analyst wrote:

Since each DeFi transaction may cost several dollars, relatively small investors as well as Ethereum users, as well as tokens developed based on Ethereum, are under pressure from high transaction fees. For an individual, if it costs $5 to get $100 worth of ETH, it doesn't seem to make sense to continue trading. The same is true for larger transactions.

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Short-term solutions didn't work

Even though Ethereum miners voted to increase the gas limit per block from 10,000,000 to 12,500,000, transaction fees remain high. The proposal was successfully voted on and passed on June 19, giving the network greater transaction capacity. (In addition, temporarily setting the gas limit to 12 million is probably to ensure the stability of the network.)

This short-term solution obviously didn't work when gas fees remained high and users were furious over the inefficiency of Ethereum transactions.

To make matters worse, some commentators believe that raising the gas limit for Ethereum blocks is a dangerous thing to do.

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

Given the current state of affairs, these concerns are theoretical: ethereum is still processing blocks without much difficulty. The point Sassano, Szilágyi and others want to make is that this change would increase miners' health risks.

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What are the solutions?

When miners choose an Ethereum transaction fee solution that doesn't fully work and poses potential risks, what long-term and safer 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 would 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, the adjustment of the gas limit will be realized 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 trying to use the second-layer security network to ease the transaction pressure on the main network. Such systems enable faster transactions, lower transaction fees, and potentially greater security and privacy. Some Ethereum Layer 2 solutions include Skale Network, OmiseGo, Starkware, and MATIC Network. While few of these solutions have achieved mainstream adoption, many believe they are critical to Ethereum scaling.

The first phase of the upgrade is expected to go live in 2020, according to developers responsible for programming and integrating ethereum 2.0. Vitalik Buterin, the founder of the blockchain himself confirmed this. Unfortunately for those worried about high transaction fees, Phase 1 is only expected to activate a very small fraction of Ethereum 2.0 technology.

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