New Hope for Ethereum Gas Fees: Data Analysis Four Possible Reasons Why Ethereum Fees Are Falling

Written by: Harith Kamarul

The price of ETH will continue to rise in 2021. Unfortunately for many Ethereum users, the rising Gas fee will follow. In 2021, a gas fee of 100Gwei will become the norm, and sometimes even more than 1000Gwei will be required.

Since late April, this trend has suddenly reversed. While Ethereum continued to hit record highs, the gas fee suddenly fell. What is more intriguing is that the gas fee has been continuously in a low range.

From April 20th, the gas fee suddenly dropped from 100+Gwei to 50+Gwei

Gas Tracker shows 24Gwei transfers unimaginable just a few months ago...

In this article, we explore possible reasons for this gas fee drop:

• Increase block size to limit gas fees

• Flashbots (designed to attack and shut down front-running bots on Ethereum) reduced the profits of PGA (Optimal Gas Auction) bot accounts

• User activity shifts to other chains

• Decline in market activity

block size increase

After the Berlin hard fork made several gas fee adjustments, key Ethereum community members said they were happy with increasing the block size to limit gas fees. The miners then increased the block size by 20%, from 12.5 million to 15 million. Larger blocks mean more transactions can be accommodated, directly reducing congestion.

The reduction in gas fees is immediate.

But is that all there is to the story? As city planners will tell you, more highway lanes does not equal less congestion. If increasing the block size is the only reason, we would expect more transactions soon and congestion would re-emerge.

This was the case in June 2020, where we saw gas fees rise rapidly within a few days of the previous block size adjustment increase. We are two weeks into the block size adjustment increase and gas fees continue to rise at a slower rate.

The last gas fee hike heralded the beginning of the DeFi boom

At the time of writing, Uniswap V3 has just been released. Even though liquidity providers moved to more capital-efficient smart contracts, the average gas fee remained at around 66Gwei.

Analysis: While an important factor, increasing the block size alone does not tell the whole story.

Impact of Flashbots on PGA Robotics

Flashbots aims to attack the preemptive trading robots on Ethereum to reduce the negative external impact and risk of MEV (miner extractable value) on the smart contract blockchain, and advocate the establishment of a trust-free, transparent and fair ecosystem for MEV to Guarantee the realization of the vision of Ethereum.

Flashbots should be familiar to those who read last month's article. Starting on April 4th, Flashbots was backed by the hashrate of the majority of miners and has only been used since then.

articlearticle). While we couldn't easily find all activity for the PGA bot accounts, the three observed active PGA bot accounts indicated that their number of transactions did inversely correlate with increased Flashbots activity.

Green bars represent estimates for the current week. Tracked robots: 0x00e54, 0x00A2a, 0x00e43

Flashbots bringing more revenue to miners also bodes well for less PGA activity. The "tips" sent to miners via Flashbots replace the previous gas fees paid for achieving MEV (Maximum Extractable Value).

The graph below compares this “tip” earned by miners with transaction fees. From almost nothing in early March, we can now see that "tips" often account for more than 5% of total income.

Another clue to the decline in PGA activity is the standard deviation of daily gas fees. Bidding may lead to a new high in gas fees, thereby increasing the volatility of gas fees. Smaller deviations indicate less PGA happening on the blockchain.

Analysis: The data is not comprehensive, but what is available indicates the impact of Flashbots.

Transaction activity shifts to other chains

With the rise of Layer 2 and other smart contract chains that replace Ethereum, many speculate that there is less activity on the Ethereum main chain than before. By looking at the funds deposited to other chains, we did see a large outflow of Ethereum, accompanied by a decrease in gas fees. These outflows were led primarily by Polygon, followed by Fantom and Avalanche.

In contrast, the withdrawal of funds from these cross-chain bridges and into Ethereum appears insignificant, indicating a net outflow of Ethereum to other chains.

But it should be noted that the net outflow of $100 million is only a small fraction of the more than $30 billion in daily settlements on Ethereum.

A curious reader might ask an obvious question at this point:

How about BSC (Binance Smart Chain) Binance Smart Chain?

Compared to its chain, Binance Chain does not rely as much on cross-chain bridges. While there is no easy way to quantify the flow on Binance Chain, we can use Binance’s net deposit volume as a measure.

There is no clear sign that outflows on Ethereum are dominating the decline in gas fees. In fact, on April 16th, a few days before the gas fee drop, there was another massive inflow of $2.4 billion.

Another angle to compare Binance Chain BSC and Ethereum is to look at the number of active addresses. The number of active users of BSC has experienced explosive growth, from 50,000 in early 2021 to a peak of 1 million. But this does not mean that Ethereum has suffered losses, because the number of active addresses of Ethereum itself has also increased steadily from 450,000 to 700,000.

What’s more, Binance Chain BSC has actually seen fewer users since the Ethereum Gas price dropped.

Ethereum’s Active Addresses Almost Match 2018 Bubble High

Binance Chain BSC has seen a 20x increase in active addresses in less than 4 months

Analysis: The impact of capital outflows exists, but is limited. Although Ethereum funds have flowed to other chains, the total transaction volume is still small compared to the settlement amount of Ethereum.

Decline in market activity

Zooming in on the active addresses graph above, we see that the number of Ethereum active addresses peaks as the block size increases. It dropped slightly after a few days, but has returned to the same level as it was at the previous peak.

Declining activity means that blocks are not being filled, however blocks are now more crowded than they were earlier this year.

Analysis: We see no signs of declining market activity.

The first three points above have played a role in reducing gas fees. As for the fourth point, although there is no data to support the statement that market activity has declined, we do hear from rumors that users will be more cautious before choosing to trade on Ethereum.

It's worth noting that as the price of ETH continues to climb, the cost of gas fees in Gwei does not provide the full picture for many of us, and we still have to bear the fees in fiat currencies.

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