Ethereum is volatile and sometimes extraordinarily high gas costs was a big topic of conversation. Critics often cite the network’s fees as a fatal flaw that renders it unusable, opening the door for an “ETH killer” to dethrone it as the leading smart contract execution platform. At the highest level, having to pay high fees to execute transactions undermines the central pillar of blockchain inclusivity.
Not all users have the capacity to pay high transaction fees. But Ethereum cannot be amortized due to its high usage cost. Understanding this perspective requires understanding the network pricing mechanism and the innovations being developed and deployed.
Gas is the fuel needed to execute transactions on the Ethereum network. On the Ethereum blockchain, gas refers to the cost required to complete 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 exchanging assets on a native ETH decentralized exchange (DEX).
Each block on the network has an upper limit on how much 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 a given time will end up in a given block.
Since every action on the network requires gas and there is a limit to the amount of gas used in each block, miners confirming transactions choose those with the highest gas (reward) first. Others are pushed to later blocks or not selected at all. Thus, gas acts as an offer from a user for block space. This dynamic results in high network charges when an increased number of users bid on a limited amount of space per block.
Read more: What are Ethereum gas fees?
Spending $10, $50 or $150 per trade is not ideal for most crypto users. Ethereum 2.0, a network-wide upgrade to make the blockchain more scalable, couldn’t come soon enough. Nonetheless, the high fees today suggest that users are enjoying ETH block space at a huge premium. High fees may be temporary, but it’s worth wondering why people tolerate them.
ETH users can head to Solana, BSC, or any other smart contract platform to execute the same trade for pennies on the dollar. But the vast majority don’t because they think Ethereum is a better platform and are willing to pay extra to use it. This is a positive indication that fees are not a weakness as many are inclined to think. On the contrary, it indicates the grip of Ethereum that other “ETH killers” lack.
The main reason why Ethereum remains superior to its counterparts, and therefore worth the cost, is that it is quite decentralized. Decentralization is essential for network security and prevents a chain from being hijacked by those who validate it. (Network security is about 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.)
This does not necessarily mean that the other chains are less decentralized. But with alternate chains, validators have a higher likelihood of working individually or collectively to rearrange blocks, reverse transactions, and perform other malicious actions. A benchmarking of Ethereum and its closest competitors shows 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 their current proof of work (PoW) consensus model. This low barrier to entry benefits decentralization and, therefore, network security. Additionally, PoW requires computer input to approve transactions, which dislocates control of supply from control of the network. Validators simply cannot buy more ETH to gain outsized power on the network. Instead, they must purchase an amount of computing power greater than 50% of the total network in order to support it. The additional cost to do so is high and would destroy the network (and thus the investment made to acquire the computing power), which discourages PoW network validators from attacking it.
After switching from Ethereum to proof of stake (PoS) consensus, you will need to acquire 32 ETH to validate the network. This equates to ~$84,400 at the current market price and ~$155,800 at the all-time high for ETH. The capital requirement to validate transactions once ETH 2.0 launches seems daunting, and it could reduce the number of validators on the network, and thus Ethereum’s decentralization, but on a relative basis, it’s low. glass knot indicates that there are approximately 107,700 addresses with 32 ETH, meaning there are over 100,000 potential validators once the migration is complete. This is positive from the point of view of desirable decentralization.
Innovations in and around Ethereum have been sparked, in part due to the high costs of ETH. ETH 2.0, or Serenity, is a network upgrade with a focus on scalability, durability, 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 impact on the environment and implement scalability features with marginal compromises on network security.
Share will target lower fees and better scalability. However, if demand continues to increase, the net impact on royalties could be marginal or negative in some cases given the network’s gas pricing mechanism. Splitting the network into 64 shards will allow it to scale up to around 100,000 transactions per second (TPS). This would be a substantial increase over the current network capacity of 30 TPS. However, the rollout schedule for these features is still largely unknown.
The development and adoption of Layer 2 (L2) has helped scale ETH into the present by reducing fees and increasing transactional throughput. Transactions processed on L2 are performed off-chain (not on the Ethereum blockchain), which insulates them from the current pitfalls of using the Ethereum mainnet (Ethereum layer 1).
Decentralize finance (Challenge) applications such as centralized enterprises have turned to 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 development phase, the amount of value locked (TVL) on Ethereum L2s eclipsed $5.5 billion (~1.7 million ETH spread across the ecosystem).
Ethereum’s volatile and often expensive gas fees can sometimes make the network difficult to use. However, sustained network usage amid high fees, juxtaposed with the rise of Layer 2 and other ETH developments, brings a clear message to the surface. The high fees of ETH actually prove that users deem the network superior, and as such, the costs are addressed in several ways. The ecosystem’s reach and usability will continue to improve as capital inflows continue and more users tap into it.