Investigating Recent Spikes in ETH Gas Fees
Did you recently pay 50c for one Ethereum transaction? Yeah… it happened to us too. In this article, we’ll go over a few reasons why the gas prices are so high right now. What did Ethereum have cooking to warrant such high prices for gas? Let’s dive in.
1) What is Gas in Ethereum?
Gas is the amount of ETH a user pays to miners to process a given transaction on the Ethereum network. Gas is essentially gas price * gas limit. While the gas limit is the maximum amount of gas you are willing to spend, gas price specifies the amount of Ether you are willing to pay for each unit of gas. This has been so since Ethereum’s inception, so what about last week was different?
2) A ton of new ETH addresses
The truth is, it’s not just week 21 that was different. Over the past few weeks, we have seen gas prices increase. A factor responsible for this is a surge in user activity level in anticipation of Ethereum 2.0. Ethereum 2.0 will mark the start of a shift from the miner-reliant proof-of-work consensus algorithm to a proof-of-stake algorithm. In a PoS system, miners are not needed to mine blocks and verify transactions. Instead, users — or stakers — verify data on the blockchain. On-chain data from Glassnode shows that 40 million addresses are currently holding Ether, up from less than 10 million in Q1 2020.
More investors are generally trying to acquire ETH before the release of Ethereum 2.0 in order to become eligible for staking and earning rewards over time, which requires 32 ETH. If no one was using the network, gas prices paid would be near 0, but as the network gets full, gas prices started to spike.
If this is the case, then what makes week 21 different? We discuss some possible reasons below.
3) Increase network demand for ETH as a result of Bitcoin’s rising fees
Bitcoin fees saw a spike with the average fee for Bitcoin transactions last week being $6. This was so because of the halving which led to a fall in the hashrate, meaning that a large number of miners have disconnected from the chain because it is unprofitable for them to have their rigs up and running.
For those who wanted faster processing times and didn’t want to pay more for their transactions, Ethereum was the next best option.
The image below shows Ethereum’s fee structure on 19th April.
This is in stark contrast to the gas price of 35 which was being recommended for slow transactions on the 21st of May when there were a lot of people using the network.
Ethereum unfortunately, couldn’t take advantage of the shift in transactions to its network as it’s not well equipped in its current state to handle the spike in transactions. It was battling its demons with DeFi also putting pressure on the Ethereum network.
4) DeFi’s rise leads to congestion
Decentralized applications that run on Ethereum and use smart contracts need gas for the blockchain network to process the information. A cursory scan on EthGasStation shows the large number of transactions on the network are all DeFi related. On March 13 where a dump in prices resulted in a spike in DeFi liquidations which led to network congestion, some open positions on dApps like Maker and Compound became undercollateralized and thus were automatically liquidated via smart contracts on-chain. The high liquidations led to network congestions which affected gas prices.
So now that it’s been established that Ethereum and its DeFi apps could lead to network congestion, which dApp was to blame for last week’s network congestion. The culprit this time around was Uniswap.
5) Uniswap pumps are the new ICO gas wars
Uniswap pumps led to the fee market, which is what happens when the Ethereum market is working at or near capacity. The fee market is a situation where some users are willing to pay more to get to the front of the line for their transactions to be processed. Remember ICO mania 2017, when people would set incredulously high gas prices to get to buy their tokens before everyone else.
We got a mild glimpse of 2017 in week 21 when everyone was trying to get in on the insane pumps on Uniswap. Everything was popping left, right and center, and no one wanted to be left out.
But everyone chases pumps, so why blame Uniswap? Compare Uniswap’s position on the chart of the average transactions on the Ethereum network from April to May. Moving from 25th to 11th position, with an average transaction volume from a paltry 11k a month to 64k this month.
A month later…
Buying a token off Uniswap means you are literally buying or selling at market price. So to not miss out and be the sucker who bought the top of the pump, more people have been keying in higher prices for gas. They were trying to get in first and fast, FOMO’ing on pumps.
In these times, make EthGasStation a good friend as it offers a great real-time view of the current fee market and what it costs to get a basic or fast transaction through. You can adjust a component of gas as per your need: gas price if you want it fast (and expensive), while making sure the gas limit is high enough to handle a SC transaction, so that it doesn’t fail.
While we have to endure this, we only hope this inefficiency will be solved by ETH 2.0.
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