Ethereum’s handling fees have soared across the board, users are miserable, how to break it?

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In the past few months, the crypto market has fully heated up. The prices of cryptocurrencies, led by Bitcoin and Ethereum, have continued to climb and even hit record highs. Most users like to hear about it. But at the same time, there is also a phenomenon that is getting more and more “Tucao”, that is, the network handling fee on Ethereum is too high.

As of the time of posting, the average Gas price on Ethereum has soared to 260 Gwei, and an average transaction fee of US$16 per transfer is prohibitive. So, on the focus of Ethereum’s handling fees, what is the actual situation, what solutions are there in the market, and what adjustments may be made to ETH 2.0 in the future, let’s sort them out one by one and look for ways to crack them.

Increasing network costs

In order to have an intuitive understanding of the changes in the transfer fee of Ethereum, in the figure below we calculated the average gas price (Gwei/10^(-9)Ether) and the average fee per transfer ( $), the time range is from October 9, 2017 to January 4, 2020. It can be seen that gas with a monthly average price of more than 50 Gwei appeared concentrated in two periods: the beginning of 2018 and the entire second half of 2020 until now. If the last peak occurred because of the big bull market and the popularity of crypto cats, the current peak is mainly due to the enthusiasm of Ethereum DeFi and the growth of stable coins.

Ethereum transfer fee (Gas) trend

Source: Etherscan Drawing: Cointelegraph Chinese

According to data from ethgasstation.info, among the top 10 addresses that consumed Gas in the past 30 days, there were 7 DeFi projects, 2 stablecoin projects and 1 scam address. Among them, Uniswap (V2) ranks first with a handling fee of 34.4k ETH, which is worth as much as 23.2 million US dollars in legal currency.

While the popularity of the network has increased in an all-round way, the network utility of Ethereum has almost reached the ceiling. The figure below shows the gas utilization (Gas Utilization) and Gas Limit changes in the history of Ethereum. It can be seen that the utilization rate of Gas has increased year by year in the past and has now reached 98%, which is close to the upper limit of 100%. In fact, in mid-June last year, Gas Limit increased by 25% after a round of community proposals were passed, but the latest utilization data shows that it is imminent to optimize the network fee structure.

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Ethereum Gas Utilization and Gas Limit Trend

Source: Etherscan Drawing: Cointelegraph Chinese

In addition, the mining revenue of miners is also a dimension to measure the changes in Ethereum’s handling fees. After Ethereum 2.0 is fully converted to PoS, block rewards under the PoW mechanism will continue. When the handling fee increases, the proportion of the handling fee in the total mining revenue will increase accordingly. In September 2020 and just the beginning of January, the fee income of Ethereum has approached 50% of the total mining revenue of miners, significantly exceeding the average value of 10% since 2018.

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Ethereum fee income trend

Source: Etherscan Drawing: Cointelegraph Chinese

Find a solution for hedging gas costs

In the face of soaring Gas fees and increasing demand for network processing, the demand for a fee solution is also increasing at this stage. For many small users who participate in DeFi Yield Farming, this demand is particularly important, and operating costs often occupy a large part of the revenue.

According to the data compiled by the research institution Longhash, there are currently two common types of Gas solutions in the blockchain development community: contract derivatives and smart contracts written using the Gas pricing mechanism for deductions and refunds.

Contract derivatives, as the name suggests, are a zero-sum game between buyers and sellers of the expected price of gas in the future, such as the uGas-JAN21 futures product launched by UMA Protocol. The smart contract written using the Gas pricing mechanism is relatively complex. The basic idea is to insert “burden reduction” codes in the contract, such as cleaning up, self-destructing contracts, cleaning up and deleting storage, etc., to keep the code concise and receive Gas refund. The tokenization of this type of smart contract is called GasToken, such as Chi Gas Token launched by 1inch.

In terms of hedging Ethereum Gas fees, the types and scale of existing products are still relatively limited. Due to the short launch time, the hedging effect is still to be tested in practice. But it is foreseeable that such tools will have real market demand before ETH 2.0 is truly realized.

ETH 2.0 EIP-1559 proposal is ready

Regarding the optimization mechanism of Gas, the Ethereum developer community also has many discussions. Among them, the most concerned is EIP-1559, proposed by the core developer of Ethereum and the founder of Ethhub, Eric Conner. This proposal is considered to be likely to solve the problem of excessive gas fees, improve user experience and optimize ETH’s monetary policy. The proposal has not yet been formally implemented, but Eirc Conner recently stated that EIP-1559 will be implemented soon on ETH 2.0.

Specifically, the proposal mainly includes the following three suggestions:

1) Increase the block Gas Limit from 8 million to 16 million (currently about 12.5 million)

2) Destroy most of the ETH in the handling fee, set BASEFEE (basic handling fee) for each block, and all transactions packaged in the same block use BASEFEE as the Gas Price. These fees will not be paid to the miners, but will be destroyed by the agreement

3) Users can tip miners by themselves

Among the above proposals, the most important is the design of BASEFEE and its destruction. The significance of the destruction, on the one hand, can prevent miners from sending transactions to manipulate the handling fee to make it unnecessary excessively high; on the other hand, it can act on the supply and demand structure of ETH. As we know, ETH 2.0 will introduce a PoS mechanism and its corresponding inflation rewards. According to the current order of ETH pledged by its deposit contract (1.5 million), the annual inflation rate is about 0.17%, and the annual bonus is 200,000 ETH. In the past 12 months, according to relevant statistics, the total transaction fee on Ethereum reached 1.69 million ETH. Assuming that this level will continue in the future and the EIP-1559 proposal will take effect, as long as the basic handling fee exceeds 12% and is destroyed, ETH will enter a deflationary mode, which will play a positive role in supporting its value.

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ETH 2.0 annual inflation rate changes with the number of ETH pledges

Source: ETH calculator Drawing: Cointelegraph Chinese

Conclusion

After the birth of Ethereum, many functional public chains have emerged, trying to replicate the route of Ethereum or surpass its status. However, from the actual situation in the past few years, Ethereum is still the fastest-growing underlying public chain platform, and the settlement value has officially surpassed Bitcoin. With its strong developer community and existing ecological foundation, in the next 2 to 3 years, we hope to witness the final realization of ETH 2.0. Regardless of network efficiency, cost structure, or ecosystem, it will gradually improve. The related optimization mechanism of Gas fee is also expected to be discussed in the community.