The transaction fee on the chain is soaring, why EIP-1559, Layer 2, and Gas tokens break the game

After the price of Ethereum broke through its record high, the short-lived excitement did not last long, and more people began to realize that the cost of using Ethereum was getting higher and higher. Before the implementation of ETH 2.0 sharding, many people began to seek solutions to improve the current network congestion and high fees.

This article starts with how each transaction cost is calculated, and analyzes how mainstream solutions such as Gas tokens, EIP-1559 proposals, and Layer 2 expansion can create a better transaction experience for the Ethereum ecosystem.

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Gas fee calculation

In the Ethereum network, whether it is a transfer transaction or the execution of a smart contract, it needs to consume the computing or storage resources of the entire network. The consumption of these resources is called Gas (fuel). The transaction fee for each chain depends on the product of Gas Used and Gas Price, and is finally settled and paid to Ethereum miners in ETH.

Gas Price refers to the price that users are willing to pay for consuming each Gas. The unit is Gwei (1 ETH = 10^9 Gwei). It also depends on the network congestion. In the case of network congestion, it can be as high as 1000Gwei. The minimum time can be as low as 1Gwei.

The number of transactions that Ethereum can currently process per second can be calculated according to the following formula: Transactions per second = Gas Used * average block interval time

Taking the average block interval of 13.2 seconds, ETH price of $1200, and Gas Price of 100Gwei as an example, the transaction costs required for various Ethereum transaction types in the case of fast transactions can be estimated:

As ETH continues to rise, the actual handling fees paid by users also continue to rise

In general, miners will give priority to packaging transactions with high Gas prices, because this will maximize their profits, and eventually trigger the highest price auction for Gas. From the perspective of user experience, such an auction mechanism will cause a phenomenon of overpayment in a short period of time in which the auction price is greatly increased in order to compete for resources. Behind this actually reflects the low efficiency of this auction mechanism, and it will also cause some unnecessary delays.

Therefore, solutions such as Layer 2, Gas tokens, and EIP-1559 have become the three main options to solve the problem of excessive transaction fees on Ethereum.

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In the Ethereum smart contract, the consumption of Gas fee is determined according to the data stored in the contract on the chain. The method of Gas token is to turn the Gas fee into an ERC20 Token, allowing users to buy and sell directly, or as a prepayment for using gas in the future. When the gas price is cheap, the user can purchase and store it appropriately, and then use it when the gas price rises.

Specifically, when the Gas price is low, Gas tokens encourage users to create or mint tokens GST1/GST2 in the contract. At this time, Gas tokens will use the funds provided by users to store data/create contracts at a lower cost. When the Gas price soars, users can use or consume GST1/GST2, and the Gas token will get network rewards, or gas refunds, by deleting data or contracts, thereby realizing the consumption of Gas at a lower price.

In June 2020, 1inch, an aggregation trading platform, released a further optimized Ethereum gas fee token Chi, which users can use to pay in transactions. "In the same transaction, burning Chi tokens will reduce the gas fee The cost has been reduced by nearly half.” 1inch official said.

In addition, uLABS' synthetic gas futures token (uGAS) adopts a solution that allows "users" and "providers" of gas to lock in their costs or benefits. The uGAS token allows users to both hedge risk and act as a speculative tool for gas prices. However, Wang Yuanming, the co-founder of Grouk, said that u gas is purely a prediction market, betting on gas price.

Layer 2 scheme

“We expect DeFi teams to start accumulating gas tokens and use them in their protocols when they need to use built-in liquidation automation during periods of severe market volatility.” Multicoin Capital pointed out in a research.

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Layer 2 scheme

As can be seen from the previous table, complex contract interactions not only require payment of tens of dollars in transactions, but also consume a large amount of Gas used. When Ethereum receives more and more complex transactions from DeFi and other applications, every The number of transactions that can be processed per second will drop rapidly, so the demand for on-chain expansion solutions will increase with the prosperity of the DeFi ecosystem. Before the arrival of Ethereum 2.0, users urgently need a product that can solve high transaction costs and experience costs.

Because of this, the Ethereum Layer 2 track has become noticeable. When interacting with the Ethereum main chain on the traditional Layer 1, this process needs to consume gas fees, while transactions or transfers on the second-layer network are actually There is no action to interact with the Ethereum mainnet, so there is no gas fee and a series of transaction costs, which in turn solves the pain point of high transaction costs.

In the end, a verifier will take the user data operation to the main chain of Ethereum for verification. The verifier can ignore all the operations of the user on the second layer network, and only needs to verify the final result of the user with the main chain of Ethereum. , its advantage is that it can greatly improve the user's transaction experience while saving a lot of fees.

Currently, Layer 2 solutions mainly include state channels, side chains, and Roullp. Ethereum has also confirmed the 2.0 roadmap centered on Rollup. It can be said that Rollup has become the mainstream technology for layer 2 expansion.

At the same time, leading DeFi players such as Uniswap, Aave, and Synthetix began to explore the feasibility of Layer 2 + DeFi. In the recent 2021 roadmap released by Sushiswap, the official stated that ZK rollups are the priority option for Layer 2. Synthetic used the Optimistic scheme to open the pledge of SNX on Layer 2. The current pledge amount has reached 2.75 million SNX, equivalent to 35 million US dollars.

When migrating to Layer2, another important consideration must be that users cannot be lost. "This is why there may already be many public chains that have better performance than Ethereum, but Ethereum still has a huge ecological advantage. Therefore, if the user's usage habits must be changed after migrating to Layer 2, then it must be Dapp operation Shang doesn't want to see it." Lu Guoning said.

EIP-1559 Proposal

On the whole, under the idea of ​​Oprimistic Rollup, the project party can directly migrate because it is compatible with Ethereum EVM; under the idea of ​​ZK rollups, the project party needs to redevelop, the migration is difficult, and the support operations are limited, but the performance is good enough to build a real barriers.

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EIP-1559 Proposal

If Layer 2 can be regarded as a layer 1 protocol outside of Ethereum, and all user operations are actually stored or packaged in Layer 2, then Ethereum’s EIP-1559 proposal is to adjust the utilization rate of Layer 1 blocks. The user has a more certain gas price and a more flexible gas limit.

Since December 21 last year, Ethereum Foundation developer Eric announced that the EIP-1559 proposal was about to be implemented, and discussions on the proposal quickly ignited hot spots. It has two main goals, the first is to make the Ethereum fee market more efficient, and the second is to improve the user experience when sending transactions.

This proposal has three characteristics. The first is that the Gas Price setting is placed in the protocol to avoid large fluctuations; the second is that the Gas Limit for the entire block will accommodate more transactions than before; the third is that most of the entire transaction fee The base fee will be destroyed, leaving only a part of the tip for the miners.

The original gas price is estimated by the wallet based on the usage of past blocks (of course, users can also adjust it manually), and in the EIP-1559 proposal, its composition will have two parts, namely base fee and gas premium, of which Gas premium can be regarded as a tip for miners or verifiers.

According to the interpretation of the EIP-1559 proposal by Encryption Vision, in this new proposal, all transactions in a block will contain two variables, one is gas target (target gas usage) and base fee, the original gas limit (original gas limit) Fixed 12500000) becomes twice the gas target.

Assume that all gas used in a certain block is less than the gas target, that is, the current gas usage has not reached the gas target. Then the protocol will think that the current base fee is too high, causing people to be unwilling to trade, and will reduce the base fee in the next block to encourage more people to trade, increase the gas usage in the block, and make the entire block gas used is close to the target usage.

Conversely, if the sum of all gas used in a certain block exceeds the gas target, it is also less than twice the gas target, that is, less than the gas limit, that is, under the current base fee, the target gas usage is exceeded, and the protocol will be adjusted. Increase the base fee and increase transaction costs.

It can be found that this solution increases the original block limit by introducing a gas target, and increases the number of transactions that can be packaged on the basis of the original 1,250,000 gas limit. At the same time, the scheme also stipulates that the change of the base fee between two blocks cannot exceed 1/8, so even if the network suddenly increases in transaction volume, it will not suddenly cause the base fee to soar.