Ethereum Gas Prices Put a Damper on DeFi Rally
The good news: Ethereum is booming. The bad news: gas fees are, too. ETH is surging past $1k—the highest it’s been since the crypto boom of January 2018. Investors have taken notice, with the co-founder of Three Arrows Capital hedge fund (which just made headlines for their SEC filing stating $1.3 billion in Grayscale Bitcoin…
By: Dan Kahan • Loading...DeFi News
The good news: Ethereum is booming. The bad news: gas fees are, too.
ETH is surging past $1k— the highest it’s been since the crypto boom of January 2018. Investors have taken notice, with the co-founder of Three Arrows Capital hedge fund (which just made headlines for their SEC filing stating $1.3 billion in Grayscale Bitcoin Trust holdings), Kyle Davies, tweeting: “I’m warming to $ETH, to be honest…I now have a basic understanding. I own it.”
Ethereum Fees at All-Time Highs
Amidst the current demand, average Ethereum gas fees surged to an all-time high of almost $900 yesterday, according to data from Glassnode. Even simple transactions like sending ETH interpersonally can generate $10 in fees. Trading on Uniswap —the largest decentralized exchange by volune—can cost over $100 in fees.
For those unwilling to pay the exorbitant gas fees, activity slows to a near standstill.
Operations performed on the Ethereum blockchain are paid in a unit called “gas,” which is priced in ETH’s smaller denomination, Gwei.
Gas fees, which are attached to every operation on the Ethereum network, are typically insignificant—oftentimes only a few cents. But as more and more users crowd into the Ethereum space, the computational burden increases. According to the latest Etherscan data, average Gwei per transaction was 170 on Sunday. That’s the highest since September, at the peak of the “DeFi summer” when the yield farming craze overtook the space.
“The issue of a slow network stems from scaling, which is the current challenge for cryptocurrencies across the board,” wrote Genesis Mining operations head, Philip Salter in a Dec. 24 article. “How can you keep transaction fees from skyrocketing because of that slowdown?”
Deterring New Users
On one hand, major market activity persisting in spite of the gas fee increase speaks volumes to how much potential wealthy investors see in Ethereum. After all, whales won’t be deterred by $100 in transactional fees.
On the other hand, the surge in gas prices illustrates a major scalability issue that presents a roadblock in Ethereum’s path to mainstream adoption. On top of making the system less usable due to overcrowding, high transaction fees deter newer users, and especially users with less financial means, from sticking with Ethereum. Even if the space is currently populated primarily by investors and developers, the current gas fees threaten to stymie long-term growth.
“Stop being poor sure but paying nearly $100 for a $4k swap just makes no economic sense,” tweeted Larry Cermak, director of research at The Block. “…Let’s be real, someone new sees this and they will likely never use that product again. Most noobs are coming in with less than $5k to allocate.”
Ethereum Layer-2 scaling solutions are aiming to tackle this issue by handling transactions off the main Ethereum chain, but to-date, none have achieved mainstream adoption within the De-Fi community. But for Ethereum’s sake, a proper scaling solution needs to come fast because competitors aren’t waiting.
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