Why Ethereum Users Tolerate Exorbitant Gas Fees
Ethereum’s volatile and sometimes extraordinarily high gas fees has been a major topic of conversation. Critics often cite the network’s fees as a fatal flaw that makes it unusable, opening the door for an “ETH killer” to dethrone it as the primary smart contract execution platform. At the highest level, the requirement to pay high fees in order to execute transactions undermines the blockchain’s central pillar of inclusivity.
Not all users have the ability to pay high transaction fees. But Ethereum cannot be written off because of its high cost to use. To understand this perspective, you need to grasp the network’s fee mechanism and the innovations currently being developed and deployed.
What is gas and how does it work?
Gas is the fuel needed to execute transactions on the Ethereum network. On the Ethereum blockchain, gas refers to the cost necessary to perform a transaction. Different types of transactions cost varying amounts of gas depending on their complexity. For example, a simple transfer of ETH requires less gas than transferring ERC tokens or swapping assets on an ETH-native decentralized exchange (DEX).
Each block on the network has an upper bound on the amount of gas it can accept (a gas limit) before it becomes invalid. The gas limit of blocks changes over time, depending on a number of factors. Thus, not all transactions at any point in time will end up in a given block.
Since every action on the network requires gas, and there is a limit on the amount of gas used in each block, miners confirming transactions choose those with the highest gas (reward) first. The rest get pushed to later blocks or don’t get selected at all. Thus, gas acts as a user's bid for block space. This dynamic results in expensive network fees when an increased number of users are bidding on a limited number of space per block.
Read more: What Are Ethereum Gas Fees?
What do high fees really mean?
Spending $10, $50 or $150 per transaction is not ideal for most crypto users. Ethereum 2.0, a network-wide upgrade to make the blockchain more scalable, could not come soon enough. Nonetheless, high fees today suggest that users value ETH block space at a massive premium. High fees may be temporary, but it’s interesting to ask why people put up with them at all.
ETH users can go to Solana, BSC or any other smart contract platform to execute the same transaction for pennies on the dollar. But the vast majority don’t because they believe Ethereum is a better platform, and are willing to pay a premium to use it. This is a positive indication that fees aren’t a weakness, as many are inclined to think. Rather, it is indicative of Ethereum’s stickiness that other “ETH killers” lack.
Why users still choose Ethereum
The primary reason Ethereum remains superior to its counterparts, and thus worth the cost, is that it is fairly decentralized. Decentralization is key for network security and preventing a chain from being hijacked by those validating it. (Network security relates to the security of the blockchain itself, as opposed to the security of the chain's smart contracts. A contract on any chain is only as secure as a developer builds it to be.)
This doesn’t mean other chains are less decentralized, necessarily. But with alternative chains, validators have a greater probability of individually or collectively working to reorganize blocks, reverse transactions and carry out other malicious actions. A comparative analysis of Ethereum and its closest competitors illustrates that it is the most decentralized smart contract blockchain in the space.
Anyone with the ability to set up a miner can validate Ethereum transactions with its current proof-of-work (PoW) consensus model. This low barrier to entry benefits decentralization and, in turn, network security. Additionally PoW requires computational input to approve transactions, which dislocates control over supply from control over the network. Validators simply can’t purchase more ETH to gain outsized power over the network. Instead, they must buy an amount of computational power greater than 50% of the network’s total in order to take it over. The incremental cost to do so is high and would destroy the network (and thus the investment made to acquire the computational power), which disincentivizes validators of PoW networks to attack it.
After Ethereum switches to proof-of-stake (PoS) consensus, you will need to acquire 32 ETH to validate the network. That equates to ~$84,400 at current market price and ~$155,800 at ETH’s all-time high. The capital requirement to validate transactions once ETH 2.0 launches seems daunting, and it might reduce the number of validators on the network, and therefore Ethereum’s decentralization, but on a relative basis, it’s low. Glassnode indicates that there are ~107,700 addresses with 32 ETH, meaning there are over 100,000 potential validators when the migration is complete. This is positive from a desirable decentralization perspective.
Innovations in Ethereum
Innovations in and around Ethereum have been set in motion, in part, because of ETH’s high costs. ETH 2.0, or Serenity, is a network upgrade with a focus on scalability, sustainability and efficiency. The centerpiece of the upgrade is rooted in a migration from its current PoW consensus mechanism to PoS. PoS will allow ETH 2.0 to reduce its environmental impact and implement scalability features with marginal compromises to network security.
Sharding will target lower fees and better scalability. If demand continues to rise, however, the net impact on fees could be marginal or negative in some instances given the network’s gas fee mechanism. Splitting the network into 64 shards will allow it to scale to an estimated 100,000 transactions per second (TPS). This would be a substantial increase above the network’s current capacity of 30 TPS. However, the rollout timing of these features is still largely unknown.
Development and adoption of layer 2s (L2s) has contributed to scaling ETH in the present by lowering fees and boosting transactional throughput. Transactions handled on L2 are done off-chain (not on the Ethereum blockchain), which insulates them from the current pitfalls of using Ethereum mainnet (Ethereum layer 1).
Decentralize finance (DeFi) applications and centralized companies alike have turned toward L2s; Uniswap recently launched v3 of its platform on Polygon, and CEX.IO also integrated with the layer 2 scaling solution. Despite being in a developmental stage, the amount of value locked (TVL) on Ethereum L2s has eclipsed $5.5 billion (~1.7 million ETH distributed across the ecosystem).
Improvements and increased volume
Ethereum’s volatile and often expensive gas fees can make the network difficult to use at times. However, the network’s sustained use amid high fees, juxtaposed with the rise of layer 2 and other ETH developments, brings a clear message to the surface. The high ETH fees actually prove that users deem the network superior, and, as such, costs are being addressed in multiple ways. Improvements in the ecosystem’s reach and usability will continue as capital inflows sustain and more users tap into it.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.