Has the "ISDA threshold" on Ethereum become an obstacle to move forward?

Text | Translated by Eric | Produced by xiao | PANews

For those of you who have seen the Wall Street blockbuster “The Big Short,” there is a scene that has parallels to the ethereum transaction fee issue. The film is set against the background of the 2008 global financial crisis, and tells the story of several investment geniuses on Wall Street who saw through the illusion of bubbles before the 2007 US credit crisis, and made money by shorting subprime mortgages and manipulating the credit default swap (CDS) market. Gained substantial profits and became one of the few investment tycoons who made a lot of profits in financial disasters.

Although the gas fee of $50 for a single Ethereum transaction in recent days is far from the minimum threshold of $1.5 billion in the ISDA master agreement in the movie, it reflects that the cost of using DeFi is already prohibitively high. (The ISDA agreement refers to the standard agreement text and its accompanying documents provided by the International Swaps and Derivatives Association for international over-the-counter derivatives transactions.)

Ethereum gas fees have experienced exponential growth over the past year. The average fee per transaction skyrocketed from 10Gwei at the beginning to 480Gwei on September 2, and has now fallen back to 82Gwei. This means that many Ethereum users pay even more in fees than the transaction itself is worth. It doesn't make sense for a retail investor to pay $50 to execute a $5 trade. This also forces most of the small players out, leaving the few remaining deep-pocketed whales to pocket all the profits.

There is no doubt that high transaction fees have become the ISDA minimum entry barrier in the cryptocurrency world. To mine on the popular "farming" platform, you need at least a few thousand dollars or more for very little yield. And to trade CDS and other complex derivatives with willing counterparties in traditional markets, you need to be bold enough to cross ISDA's minimum threshold.

Founded in 1985, the International Swaps and Derivatives Association (ISDA) currently has more than 800 members from 56 countries. The ISDA Master Agreement aims to create a standardized way of conducting large transactions in the foreign exchange and interest rate swap markets. These markets trade trillions of dollars a day, and typically only banks, corporations and high-net-worth investors have ISDA master agreements, akin to having a special backstage pass to a sold-out concert. On the surface, the ISDA Master Agreement is intended to make it easier to net transactions between different jurisdictions. In fact, it is more like an exclusive ticket to the most luxurious casino. Trying to trade large sums without ISDA is simply impossible.

In some cases, hedge fund managers, former investment bankers and heavyweight managing directors have been awarded ISDA master agreements, which allow them to act as counterparties in some multibillion-dollar over-the-counter deals in their personal capacity. In exceptional circumstances, even individuals working for major banks are free to enter into ISDA master agreement transactions with their employers themselves, but this is a serious violation of existing conflict of interest principles.

Tze Tung Chong, a former director of derivatives at companies such as Citadel LLC, said: "Only the top executives in the financial world get this kind of honorable treatment. You are either very rich, or you are a top financial expert, but perhaps most importantly, You need to have strong connections in the bank."

But if retail investors still insist on buying derivatives after assessing their risk tolerance, they have other options. Retail investors did not have the necessary capital and technology to invest in these financial instruments until the past two decades, thanks to the advent of online brokers and more educational resources. But even so, the minimum threshold still exists. Some of the more established online brokerages require clients to make a minimum deposit of $5,000 to $10,000. The Financial Industry Regulatory Authority (FINRA) is the regulatory agency that develops and enforces the rules governing U.S.-registered broker-dealers and broker-dealers. The agency defines a "typical day trader" as a margin client who needs to maintain a total account balance of $25,000 or more on any trading day. If the account falls below the $25,000 requirement, the typical day trader will not be able to day trade until the account returns to the $25,000 minimum equity level.

On the other hand, one could also argue that these minimum thresholds are meant to protect retail investors from risky gambling strategies packaged as “complex financial instruments”. This makes sense. Still, investing in tokens like YAMS and SUSHI is not something that newcomers to cryptocurrency should be encouraged to try, nor does it demonstrate the true nature of the technology. But ethereum is much more than these cheap stocks packaged as "food tokens," and there are still many aspiring Solidity developers who want to get their hands on the tech stack. Many new Ethereum-based projects are still exploring legitimate real-world use cases that could actually lead to some non-monetary rewards. Many developers want to use legitimate decentralized blockchains to build legitimate products. Stopping the deployment of decentralized projects on the Ethereum main network because of cost issues will only defeat the original intention of Ethereum. In addition, it may also become a key factor affecting the adoption of Ethereum, and other smart contract protocols with lower fees may take the opportunity to replace it.

There was a time when bitcoin mining was relatively easy and inexpensive for the average person. But now you need at least a few million dollars and a lot of manpower to generate economies of scale. Ethereum is still inexpensive to use in most cases. But if the trend of rapidly rising Ethereum transaction fees this summer continues in the next few years, and even many experts believe that Ethereum 2.0 cannot reduce high transaction fees, it is expected that the "ISDA" threshold on Ethereum will be even higher. Many aspiring users were turned away.