A New Hope (for Gas Price)
ETH prices have relentlessly climbed over the course of 2021. Unfortunately for many Ethereum users, this has come at the cost of relentlessly climbing gas prices as well. Prices in the 100's of Gwei have been the norm in 2021 with even 1,000+ Gwei seen at times.
Since late April, the trend has suddenly reversed. While ETH continued reaching all time highs, gas prices dropped abruptly and — more intriguingly — have continued at a lower range.
In this article, we take a look at possible reasons for this drop:
- Gas limit (block size) increase
- Flashbots cutting down PGA (Priority Gas Auction) accounts’ profits
- Activity moving to other chains
- Less activity in the market
Gas Limit Increase
The Berlin Hard Fork made several gas cost changes, following which key community members stated their comfort at having block gas limits raised. Miners subsequently increased this by 20% from 12.5 million to 15 million. Larger blocks means more transactions can be fit in, directly impacting congestion.
The drop in gas prices was immediate.
But is this all there is to the story? As urban planners would tell you, more highway lanes do not equal less congestion. If the increased gas limit was the only reason, we would expect more transactions shortly afterwards and congestion to be renewed.
This was seen in June 2020, as we saw gas prices quickly shooting up within days of the last block size increase. We are now two weeks from the current block size increase and gas prices continue at its lowered rate.
At the time of writing, Uniswap V3 has just launched. Even as liquidity providers migrated to its more capital-efficient contracts, average gas prices remained at 66 Gwei.
Analysis: While certainly a big factor, gas limit increase alone does not tell the full story.
Flashbots Impact on PGA Accounts
Readers of last month’s article will be familiar with Flashbots. Flashbots became supported by the majority of miners by hashrate from April 4th and have only gone up in use since then.
As Flashbots become more widely used, PGA drops as there are little ways to bid against a miner-included frontrun (go through last month’s article if this doesn’t make sense!). While we can’t easily find all the activity of PGA accounts, anecdotally looking at three active ones show that their transaction counts do inversely correlate with increased Flashbots activity.
More revenue for miners from Flashbots is also a signal to decreased PGA activity. Tips sent to miners through Flashbots are amounts that otherwise would have been spent on gas costs by those executing MEV (Maximal Extractable Value).
The chart below compares this tip amount with transaction fees earned by miners. From next to nothing in early March, we can see the tip is now regularly making up more than 5% of combined amounts.
Yet another clue to a drop in PGA activity is the standard deviation in daily gas prices. Competitive bidding may lead to gas prices being pushed to new highs, increasing the variance of gas prices. Smaller deviations point to there being less PGA happening on the blockchain.
Analysis: The data isn’t comprehensive but what is available points to an impact by Flashbots.
Activity Moved to Other Chains
With the rise of Layer 2 and other smart contract chain alternatives to Ethereum, many have speculated that the main Ethereum chain is simply seeing less activity than before. Looking at the deposits into known bridges for these other chains, we do see a large outflow from Ethereum coinciding with the reduced gas prices. This has predominantly been led by Polygon (Matic), followed by Fantom and Avalanche.
Withdrawals into Ethereum from these bridges pale in comparison, showing a net outflow from Ethereum into these other chains.
However, it’s important to keep in mind the scale of these outflows. A net outflow of USD 100 million makes up a tiny fraction of Ethereum’s more than USD 30 billion value settled per day.
The inquisitive reader might ask a glaring question at this point:
What about BSC (Binance Smart Chain)?
BSC doesn’t rely on cross-chain bridges as much as the others. While there is no easy way to quantify the flow on chain, we can use net deposits into Binance as a proxy.
There isn’t a clear indication for outflow from Ethereum prior to reduced gas prices. There was actually a large inflow of USD 2.4 billion on April 16th, several days before prices were reduced.
Another angle to compare BSC and Ethereum with is to look at the number of active addresses. BSC has experienced an explosive growth in active users, from 50,000 at the beginning of 2021 to a peak of 1 million. This hasn’t come at the expense of Ethereum however, as Ethereum itself has seen a steady growth from 450,000 to 700,000.
More to the point, BSC has actually seen a drop in users since Ethereum gas prices dropped.
Analysis: Impact is there but limited. While there are outflows into other chains, total volumes are minimal compared to Ethereum’s value settled.
Less Activity in the Market
Zooming in to the same active address chart above, we see that Ethereum activity peaked right as the gas limit was increased. It then fell slightly for some days but has already recovered back to the same level.
Less activity implies blocks that are not full. However, blocks are even more full now than it was earlier in the year.
Analysis: We don’t see evidence of reduced activity in the market.
The first three points above all play their part in reduced gas prices. As for the fourth, while the data do not back up claims of reduced activity, anecdotally we do hear of users thinking twice before making transactions on Ethereum.
It is important to note that as ETH prices continue climbing up, gas costs in Gwei do not give the full picture for many of us who still have to live with fiat expenses.
With all that said, gas prices have clearly recovered for the better recently. As we near better fee stability courtesy of EIP 1559 and cheaper costs from scaling solutions on Layer 2 and Eth2, here’s to a new hope for Ethereum gas prices!
