Ethereum Gas Fees Record a YTD Low as Congestion Eases
In May 2021, Ethereum Gas Prices recorded an all-time high of approx 68.3USD per transaction. However, as of June 29th, the price had dropped to approximately 3.85USD — recording over a 94% decrease in less than 2 months.
Finally hitting close to the December 2020 low, this is one of the fastest rates Ethereum gas fees have dropped since it was introduced in 2015.
But hold on…what are gas fees?
Gas fees refer to the cost of sending a transaction on the Ethereum network. Also known as transaction fees, it can equally be referred to as an estimate of the amount of computational effort needed to execute a transaction on the network.
As the name suggests, Gas models the characteristics of the petroleum gas needed to fuel a car. Imagine hiring a driver to help you move some goods from point A to B. In addition to paying the driver for the service, you’ll also have to buy some gas for the car so that the driver can move the goods.
Similarly, using the Ethereum Virtual Machine (EVM) incurs energy costs on miners, who are responsible for executing all code operations on the network. Gas is used to measure how much energy is required to execute these operations and the equivalent fee is paid to miners.
Sitting confidently as the second-largest blockchain network after bitcoin, Ethereum is recording an increasing usage which has led to congestions in the network. In order to have their codes and/or transactions processed faster, users bid higher gas-to-ETH exchange rates during times of network congestion. Therefore, leading to a spike in the Gas Fees.
A sudden decline in gas fees may be a result of many things, but an obvious factor, in this case, is a decline in the number of transactions requested on the network. As we pointed out earlier, the higher the number of transactions and/or congestions, the higher the gas fees and vice versa.
The comparison chart below shows a similar trend in Ethereum’s transaction volume and gas fees over the years.
A further look into the activity on decentralized exchanges (DEX) data from Dune shows that the weekly DEX volume has dropped to below $10 billion on June 28 from above $40 billion on May 17.
So, what is causing the sudden decline in transaction volume?
First, we need to understand that Ethereum is a foundation layer for a lot of DEXs. Therefore, if there are few exchanges happening on these apps, then it will directly affect the number of transactions on Ethereum.
Recall that on the 18th of May, there was a massive devaluation of almost all the cryptocurrencies worldwide. Analysts say that the devaluation happened as a result of China’s Cryptocurrency ban which resulted in over $7.5 billion liquidations in 24 hours, where the largest single liquidation order of $67 million happened on the Chinese-owned Huobi-BTC.
This generally affected the trust in cryptocurrencies, resulting in a decline in transactions since the 18th of May. But is it safe to say that this is solely what caused the massive 94% decline in Gas Fees? Let’s dig a little deeper by looking at Ethereum’s past data on transaction volume.
From the above chart, there was approximately a 15.4% decline in transaction volume between the 9th of May and the 17th of May after which the massive devaluation happened. A further 16.2% decline was recorded between the 17th of May and the 30th of June.
This shows that there had been a decline in Ethereum transaction volume even before the devaluation. Therefore, it’s not sufficient to solely blame the sudden decline on the recent massive devaluation.
What led to the initial 15.4% dip then?
Besides the general crash in cryptocurrencies across the world, the growing adoption of Ethereum layer 2 solutions has also helped lower Ethereum’s gas fees. In fact, a large number of Ethereum users have turned to solutions like Binance Smart Chain (BSC), Polygon, etc., to house their Decentralized finance (DeFi) apps.
In May 2021, DeFi Oracle Umbrella Network announced that it was shifting its base from Ethereum to BSC. Also, Layer 2 platforms like Polygon are increasing in popularity due to their very low transaction fees.
As more users move to use these Layer 2 solutions, there is a reduction in the number of people on the Ethereum network. Hence, a reduction in transaction volume.
Another important factor that has helped reduce the gas fees is the rate at which traders are moving from using Priority Gas Auctions (PGA) to bid up gas prices to the usage of private channels.
With PGA, traders use bots to monitor average gas fees and bump up their bid a little higher than the average so that miners can prioritise it over other transactions. By moving to private channels like Flashbots, traders make their bids in private, making it difficult for a third party to see other traders’ bids.
In conclusion, it’s safe to say that the declining gas fees on Ethereum were caused by several factors — the decline in cryptocurrency trading across the world, the rise of layer 2 solutions, and the adoption of private bid channels.