What’s being done to combat rising gas fees on Ethereum?
in Ethereum (ETH)
Nobody denies it, the gas fees on Ethereum have gotten out of control. As these words are being written sending an Ethereum transaction costs at least $10, and an ERC20 transaction costs $25. That’s how much it costs for a simple transaction, using a dapp like MakerDAO or Uniswap can cost $100 or more.
This can’t go on forever. One of the most promising aspects of Ethereum is that it can provide financial services to billions of people around the planet who don’t have a traditional bank account. That will never happen when sending a bit of ETH costs as much as some people make in a day.
The good news is that scaling solutions are rapidly being developed and implemented. In this article we’ll look at the Ethereum gas fee and what’s being done to get it back to a reasonable level.
Ethereum Network Congestion
Dapps (decentralized applications) are far and away the largest contributors to network congestion on Ethereum. Dapp use is the reason the Ethereum gas fee is so high and Uniswap is the number one contributor to high gas fees. Aave and SushiSwap are also popular drivers of network traffic. You can check out current gas fees and the largest Ethereum protocols that are using gas by checking here.
Some people have asked how is the transaction fee calculated in Ethereum?
As with most things in life, the transaction fee is determined by supply and demand. Imagine what the Ethereum network was like when it was first released. At the time, sending some ETH might have only cost $0.05. That was the average fee that would have gotten your transaction included in the next couple of blocks.
At some point a trader decided to pay $0.10 for a transaction, to guarantee that it would get included in the very next block. Since miners can decide which transactions to include in the blocks, they’re incentivized to immediately include transactions with the highest fees.
If enough people start paying $0.10 to get a transaction cleared faster, then $0.10 becomes the new normal price and traders must pay $0.15 for priority. This cycle repeats over the years until you reach the point where a basic transaction costs $10 and a fast transaction costs $30.
Tips to avoid high gas fees
One of the easiest ways to avoid a high Ethereum gas fee is to submit your transaction during a period of non-peak demand. For example, gas fees on Sunday night American time are typically lower than normal. The inverse is also true. Gas fees tend to be higher during North American business hours. That’s when most people are using the Ethereum protocol and the high demand leads to a high ETH gas fee.
Another way to avoid high gas fees is to batch transactions. Rather than send ETH to an exchange several times a month, save up the ETH and send it in one transaction. Since the fee isn’t much different whether you send $100 or $1,000 of ETH, think about combining transactions rather than sending multiple, smaller transactions.
Of course these are just temporary workarounds. Over time the Ethereum developers are going to find new ways to reduce the extraordinarily high gas fees. That’s a topic we’ll cover in the next section.
Do high gas fees drive away users?
You’ve heard the joke; nobody drives anymore, there’s too much traffic.
Nobody uses Ethereum anymore, the gas fees are too high. Well… The gas fees are frustratingly high because so many people are using Ethereum. Or, more accurately, so many wealthy investors and traders are using Ethereum. Paying $50 for a $500,000 transaction is a no-brainer.
The problem is that these whales are making Ethereum virtually unusable for the regular person, the type of user who sends $100 at a time. For the small guy the network has become too expensive to make any economic sense. However, all is not lost and lots of cool scaling solutions are on their way.
Short Term Solutions
Optimistic rollups and payment channels are two short-term measures that could start reducing gas fees almost immediately. Here’s how they work.
An optimistic rollup is an offchain scaling solution where Ethereum transactions are processed offchain but the results are regularly published onchain. Here’s an analogy to explain how it works.
Imagine that the Ethereum mainchain is a supercomputer. An optimistic rollup is a smaller computer connected to the supercomputer, and the smaller computer can execute a certain group of transactions. This alleviates the load on the supercomputer (Ethereum mainchain) and all of the transactions happening on the smaller computer (optimistic rollup) are faster and cheaper.
Optimistic rollups compute transactions offchain but the protocol maintains security by regularly publishing the results to the Ethereum mainchain.
The downside of an optimistic rollup is that it reduces interoperability. Ethereum is famous for money legos, where a bunch of different DeFi projects connect with each other. This interoperability enables all sorts of interesting financial products to be built. However, if all of the Ethereum dapps are running in different optimistic rollups, interoperability becomes much more difficult.
Ethereum protocols have to weigh the costs and benefits as they decide whether optimistic rollups are a good scaling solution for their needs. More information about rollups is available in this article: How Will Ethereum scale?
Payment channels are a way to connect two or more wallets so they can send fast payments back and forth. For example, imagine if Amazon started accepting ETH as a payment. Coinbase could create a payment channel between their wallet and Amazon’s wallet. Coinbase users could send ETH to Amazon without paying a fee.
What’s cool about payment channels is that they also support ERC20 tokens. So maybe instead of ETH, most users would send DAI or USDC to Amazon. Payment channels are a great way to avoid the Ethereum gas fee and get fast transactions.
More information about payment channels is available here.
Are they working?
Payment channels and optimistic rollups are rapidly being brought online to help reduce the high Ethereum gas fee. For example, the popular project Synthetix has begun working with Optimism to move some of Synthetix’s computation needs to an optimistic rollup. And the Aave lending platform has tried to stay ahead of the DeFi competition by optimizing their own internal gas costs, leading to an approx 50% reduction for Aave users.
We expect to see a lot more projects that are adopting these types of scaling solutions in the coming months.
Long Term Scaling Solutions
Ethereum’s long-term solution to high gas fees is sharding. Sharding will do what the name suggests, it will split the Ethereum blockchain into 64 shards. Each shard will act like its own blockchain, but all of the shards will be interconnected and communicate between themselves.
Because Ethereum applications are going to run on different shards the Ethereum gas price should be significantly reduced. Network congestion and demand will be spread out over multiple shards, rather than all transactions being computed on one chain. More information about sharding is available on Ethereum’s website.
Sharding is interesting because it can be used in conjunction with optimistic rollups and state channels. Together all three of these technologies can be used to reduce gas fees on the Ethereum network.
The downside of sharding is that, like optimistic rollups, it decreases interoperability. Since dapps aren’t running on the same chain it becomes more complicated for them to quickly communicate with each other. However, Ethereum developers are confident that they’ll be able to find solutions to the interoperability problem. Many people are hopeful that in the long run sharding will solve the Ethereum gas fee problem once and for all.
Change is Coming
Ethereum gas fees are insane right now, we all know it. Thankfully change is coming. One of the silver linings of a massive problem, like ultra-high gas fees, is that it incentivizes everyone to come together and find a solution. We see that now, with dozens of dapps and protocols that are creating and implementing scaling solutions to beat the gas fees.
There’s also the growing reality of the blockchain multiverse, where multiple chains (like Polkadot and Cosmos) will be connected. We can see this happening already, with Ethereum-based Dapps expanding onto Binance Smart Chain, in order to cut costs and keep their services affordable for users.
In the long run we expect that some combination of payment channels, optimistic rollups and sharding will reduce gas fees to a normal level and regular people will be able to start using Ethereum again.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.