Blockchain Gas Fees and Stablecoins

Now that Ethereum is poised to adopt EIP-1559, it helps to rethink the original purpose of gas fees, namely that it’s solely for security. This discussion is crucial for networks that are Ethereum Virtual Machine (EVM) compatible: such as Hedera Hashgraph, Binance Smart Chain, Harmony, etc. The rationale for gas fees is security, period. It does not exist for the benefit of the Bitcoin miners, nor for that of transaction validators, much less for the benefit of network owners.

A network or blockchain with no fees is subject to denial of service attacks, which can kill a network in an instant. With gas fees, the attacker has to spend money for the attack and the bigger the attack, the more money required. In other words, gas fees increase the risk-reward ratio for the attacker. This should be the only purpose of gas fees. (There is an economic rationale, in that each transaction consumes resources and fees are payments for use of those resources, but this can be paid indirectly such as by way of staking as in EOS.)

There are two mechanisms that increase the absolute price of gas as a network grows:

1. Given that the native token for a network increases in purchasing power as the number of network users grows, the effective price of gas goes up as the native token goes up in value. This then also increases both the risk and reward by about the same factor, thereby keeping the risk-reward ratio fairly constant.
2. On top of this natural increase in gas fee brought on by increasing native token value, it makes sense to increase the fee price in terms of the native token in times of congestion, in order to increase the risk more than the reward. Denial of service attacks are basically simulated congestions, so increasing gas price as congestion increases also increases the risk without increasing the reward.

The above dual mechanisms have implications on the native token itself: a native token with increasing value helps in securing the network behind the token (see point 1 above). V. Buterin recognized this and Ethereum went the way of Bitcoin in terms of adjusting ETH supply to satisfy demand: in other words, do not increase ETH supply to meet demand so that its price or purchasing power could increase similar to Bitcoin. The original plan was to supply as much ETH as demand goes up, thereby keeping its price relatively stable compared to Bitcoin. It was for security reasons tha the managers of Ethereum decided to go with increasing value per token rather than increasing token quantity.

What about smart contracts whose execution can carry much more value per unit gas than regular ETH transactions? For example, DeFi transactions such as flash loans. There can be millions of USD worth of money involved in a flash loan, but the transaction fee incurred by the user can be less than 10 USD. The risk-reward ratio in this case is very low (almost no risk compared to huge rewards). This is indeed now a vulnerability for which the smart contract designers must take into account.

The same can be said about non-Ethereum but EVM-compatible networks. The purpose of the gas fee is not to benefit the managers nor validators: as in Ethereum, it is also for security. This is regardless of whether the network in question is permissioned or not.

Monotonic Increase in Gas Fees is not Good for Stablecoins

Tether migrated USDT from Bitcoin to Ethereum in August, 2020 (and to other blockchains in 2021) because gas fees in Bitcoin were multiples of that for Ethereum. However, gas fees in Ethereum have also increased, not by as much, but increased nevertheless. Tether can spread USDT to other networks (as it has indeed done), but this can be not only expensive to do but very risky as well because, for every network it migrates to, USDT’s vulnerability surface area increases. Rather than migrate to more blockchains, I think Tether has to come up with a better strategy.

Stablecoins are in a tough position with respect to gas or transaction fees. By definition, a stablecoin value does not increase; however, it seems that it has to exist in a blockchain with increasing gas price. Even in Hedera Hashgraph or even TRON, where gas fees are presently a tiny fraction of that in Ethereum, there’s no guarantee that it would remain so, if these networks become as popular. Stablecoins have to be widely used than Bitcoin or Ethereum, which means that, at some point in its growth, a stablecoin becomes a heavy load on the blockchain in which it resides. Gas fees then naturally go up precisely because of stablecoin transactions. (USDT transactions started dominating Ethereum from the time it moved to the second-largest network. It has also become the dominant token in TRON in terms of transaction count since its inception there.)

The real promise of stablecoins is in daily use for transacting everyday stuff. Right now stablecoins are mostly used in exchanges. In order for stablecoins to spread from exchanges to daily use, stablecoins have to find a blockchain that is both secure and has a stable, low-cost transaction fee. A low-cost transaction fee allows for small, daily transactions, the kind you would do to buy coffee, for example. Or, even a remote transaction, say a client in Japan paying for services of a remote personal assistant in the Philippines.

A Blockchain Designed for Stablecoins

What every stablecoin needs is a blockchain in which the transaction fees are priced in terms of the stablecoin itself. In other words, talking specifically about the RockStable stablecoin ROKS, we need a blockchain whose native token is ROKS itself. This would take care of the first mechanism that makes transaction fees to go up in Bitcoin, Ethereum, and other non-stable blockchains: just price the gas and pay for it using the native stablecoin. Security can still be ensured because the second mechanism is kept: there is a BASEFEE (as proposed in EIP-1559), and the dynamic price is either above this BASEFEE when the network is congested, or below if not congested.

A Polkadot parachain offers the benefits of shared security in the Polkadot Relay Chain without DOT-based fees:

“The transactions that take place within Polkadot’s shards — parachains and parathreads — do not incur Relay Chain transaction fees. Users of shard applications do not even need to hold DOT tokens, as each shard has its own economic model and may or may not have a token. There are, however, situations where shards themselves make transactions on the Relay Chain.”

Polkadot offers the best solution for stablecoins at this time. Every stablecoin implemented as a parachain in Polkadot can establish its own fee, priced in the native token (the stablecoin itself).

RockStable is therefore looking into implementing ROKS as a Polkadot parachain.