What’s Caused Ethereum Gas Fees To Hit Record Lows?
According to Arcane Research’s report, Ethereum transaction fees are at their lowest level in six months. The current Ethereum blockchain’s average fee is $15, compared to hundreds of dollars during peak traffic late last year. Currently this means the Ethereum network’s cheapest transaction fee is as low as $1.50. The last time Ethereum fees were this low was back in August 2021. Fees have been steadily declining since the second week of January. Arcane suggested, “If you have been waiting for lower fees before swapping tokens or minting NFTs, now might be a good time.” It’s also true that as the cost of Ethereum has itself declined in value, almost 15% in the last month, which may have also contributed to the fall in transaction fees.
Why did Ethereum gas fees plummet?
To help speed up transactions, every time a user uses an Ethereum network service, a transaction fee known as ‘gas’ is incurred. Gas prices are denoted in small fractions of ETH called ‘gwei’. This is because each interaction on Ethereum necessitates a certain amount of mining resources on the network to be supported. Gas fees vary depending on the transaction’s complexity and how quickly users want the transaction to settle. The higher the gas fee, the more complex and quicker the transaction. An essential wallet-to-wallet transfer, for example, is a low-cost and straightforward. In contrast, more heavy-duty token swaps or minting NFTs necessitate more network resources and bandwidth and thus involves higher gas fees.
Due to the then-Dogecoin craze and the popularity of NFTs, the Ethereum network was heavily congested in mid-2021, causing transaction fees on the Ethereum network to skyrocket by 470% compared to earlier this year. According to a recent report, the average transaction fee on the Ethereum network was more than $50 for a long time in 2021. The cost of conducting more complex token exchanges can exceed $200. According to data from Etherscan.io, which tracks real-world network activity, the drop in gas fees is even lower. At the time of writing, the tracking site shows basic transactions with gas fees of only $1.50.
As way of background, it’s worth noting that Ethereum miners, whose role is to verify and process transactions, are awarded the gas fee in return for their services. Which means if the gas price is too low, miners can ignore such transactions. At its simplest therefore, the price of gas fluctuates with supply and demand for processing power, not unlike Manhattan street sellers who increase their umbrella prices to customers at the sight of rain.
Reasons for the drop in Ethereum gas fees
There could be several reasons for the drop in usage and gas fees on the Ethereum network. For more than a year, the most popular driver of transaction volume on the Ethereum network has been decentralized finance (DeFi). At DeFi’s initial launch, the Ethereum network had over 90% traffic share. DeFi dominance in the Ethereum blockchain network is waning as more imitators of the Ethereum network emerge, according to DeFi Llama. Users have been moving transactions to other blockchains with cheaper fees, and the current DeFi market share distribution below shows that the market share of the Ethereum network is being eaten away:
• Ethereum: 54%
• Terra: 13%
• Binance Smart Chain: 6.0%
• Avalanche: 5.5%
• Other: 22%
There are also some networks called Layer 2 solutions that run on Ethereum’s Layer 1 blockchain. Since the operational efficiency of the L2 network better than the underlying blockchain, the fees for these L2 platforms are much lower. Data from the L2fees.info website reveal that the following are some of the cheapest L2 blockchain networks:
• Loopring: $0.05
• ZKSync: $0.07
• Polygon Hermez: $0.25
• Optimism: $0.25
With such increasingly fierce competition from Layer 2 alternatives, Ethereum developers hope to complete the ETH 2.0 upgrade as soon as possible. With the network upgrade, the processing speed of the Ethereum blockchain network will take a quantitative leap forward, reaching more than 100,000 transaction per second (TPS) processing speeds, further reducing transaction costs and settlement delays on the Ethereum network. Indeed, as confirmed by CoinDesk, “over 10 million ether (ETH) is now locked on Ethereum’s Eth 2.0 staking contract ahead of a planned upgrade to a proof-of-stake blockchain, data from analytics tool Dune Analytics show.”
According to some media reports, the decrease in NFT transactions is the cause of the reduction in Ethereum gas fees, but this does not appear to be the case in BigONE’s opinion. Looking at the past 30 days of activity on NonFungible.com, an authority on NFT metrics, it is possible to see that the number of NFT sales has increased by more than 550%, the sales revenue has increased by more than 230%, and the number of active wallet addresses has increased by nearly 300%. As these figures show, the NFT market remains active, which suggests the decrease in Ethereum’s gas fee is not primarily a result of NFT. However, it’s also reported that “one only has to look at how the trading volume on OpenSea declined from $247 million to $124 million from February 1 to February 6, during which the median gas fee also fell from 134 gwei to 65 gwei” to see why there is uncertainty about the cause of the decline.
With the ongoing advancement of blockchain technology, there will be an increasing number of ‘Ethereum killer’ blockchain networks that intend to or have surpassed Ethereum. Therefore, as market competition increases, it should benefit users by driving down transaction fees prices for DeFi and NFT transactions in particular.