Ethereum is volatile and sometimes extraordinarily high gas fees has been a major 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, the requirement to pay high fees to execute transactions undermines the central pillar of blockchain inclusiveness.
Not all users have the option of paying high transaction fees. But Ethereum cannot be delisted due to its high usage cost. To understand this perspective, we must understand the network pricing mechanism and the innovations currently 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 trading assets on a native ETH decentralized exchange (DEX).
Each block in the network has an upper limit on the amount of 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. So, at any given time, not all transactions will end up in a given block.
Since every action on the network requires gas and there is a limit on the amount of gas used in each block, miners who confirm transactions choose those with the highest gas (reward) first. The rest are pushed to later blocks or not selected at all. Thus, gas acts as a bid for a user's block space. This dynamic results in high network fees when an increasing number of users bid on a limited number of space per block.
Spending $10, $50, or $150 per transaction is not ideal for most crypto users. Ethereum 2.0, a network-wide upgrade aimed at making the blockchain more scalable, couldn't come soon enough. Nonetheless, the high fees today suggest that users are valuing ETH block space at a very high price. High fees may be temporary, but it's worth wondering why people tolerate them.
ETH users can access Solana, BSC, or any other smart contract platform to execute the same transaction for pennies on the dollar. But the vast majority don't do this 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. Rather, this indicates the rigidity 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 to prevent a chain from being hijacked by those who validate it. (Network security concerns the security of the blockchain itself, as opposed to the security of the smart contracts on the chain. A contract on any chain is only as secure as a developer builds it. )
This does not necessarily mean that other chains are less decentralized. But with alt chains, validators have a greater likelihood of working individually or collectively to rearrange blocks, reverse transactions, and carry out other malicious actions. A comparative analysis of Ethereum and its closest competitors shows that it is the most decentralized smart contract blockchain in the industry.
Anyone with the ability to setup 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 supply control from network control. 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 network's total in order to take over. The additional cost of achieving this is high and would destroy the network (and therefore the investment made to acquire the computing power), which would deter PoW network validators from attacking it.
After Ethereum moved to proof of participation (PoS), you will need to acquire 32 ETH to validate the network. This equates to approximately $84,400 to current market price and ~$155,800 at ETH’s all-time high. 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 therefore Ethereum's decentralization, but on a relative basis it is low. Glass knot indicates that there are approximately 107,700 addresses with 32 ETH, meaning there will be over 100,000 potential validators once the migration is complete. This is positive from a perspective of desirable decentralization.
Innovations in and around Ethereum were initiated, in part, because of the high costs of ETH. ETH 2.0, or Serenity, is a network upgrade focused on scalability, sustainability, and efficiency. The centerpiece of the upgrade relies on a migration from its current PoW consensus mechanism to PoS. PoS will enable ETH 2.0 to reduce its environmental impact and implement scalability features with marginal compromises on network security.
Sharing will aim for lower fees and better scalability. However, if demand continues to increase, the net impact on rates could be marginal, or even negative, in some cases, given the network's gas pricing mechanism. Dividing the network into 64 shards will allow it to scale to around 100,000 transactions per second (TPS). This would represent a substantial increase over the current network capacity of 30 TPS. However, the deployment timeline for these features is still largely unknown.
The development and adoption of Layer 2 (L2) has helped evolve ETH today by reducing fees and increasing transactional throughput. Transactions processed on L2 are carried out off-chain (and not on the Ethereum blockchain), which insulates them from the current pitfalls of using the Ethereum mainnet (Ethereum layer 1).
Decentralize finance (Challenge) applications like centralized companies have turned to L2; Uniswap recently launched v3 of its platform on Polygon, and CEX.IO also integrated with Layer 2 scaling solution. Although it is in development stage, the amount of locked value (TVL) on Ethereum L2 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, points to a clear message. High ETH fees actually prove that users view the network as superior, and as such, costs are approached in several ways. Improvements in the reach and usability of the ecosystem will continue as capital flows continue and more users gain access.