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How can Ethereum solve historically high gas fees?

Photo of: Nathan VDH
by Nathan VDH

2020 saw a massive explosion in the use of Ethereum, particularly in the context of decentralized finance projects (DeFi). In one year, the funds under management in this sector have grown fourteen times from $500 million to more than seven billion dollars, with an ever-increasing rate of growth. Unfortunately, this phenomenon brings its share of problems, in particular the increasingly high cost of transactions, which raises the question of large-scale use of the Ethereum network in its current state.

The Ethereum blockchain is one of the most promising of the whole cryptocurrencies ecosystem, with many new services developments made possible thanks to its existence. But when each transaction costs ten dollars or even more, it represents an increasingly important barrier to the use of any kind of services, however excellent they may be. In this article, we will detail the problem and possible solutions.

In the same way as on the Bitcoin blockchain, each Ethereum transaction requires the payment of a commission paid to the minors who validate the transactions, and which is specifically called “gas” on Ethereum. The amount of the commission depends on two factors. The complexity of the transaction determines the amount of gas. For a simple transaction of sending ethers, the amount is low, but for a complex transaction that interacts with a smart contract, the amount is much higher. The second factor is the price of the gas in ethers, and it is the user who chooses it when he triggers the transaction from his portfolio. The total cost of the transaction is therefore the quantity of gas multiplied by its price.

Of course, a user can choose a low gas price or no gas price at all. But miners always give priority to transactions with a high gas price, which gives them a better return. In the event of network congestion, the price of gas will therefore tend to increase, according to a simple law of supply and demand. And this is what has recently happened in the market, multiplying the costs of transactions by a factor of 10 since the beginning of 2020 alone.

Increase Gas Limits

The simplest solution is to increase the amount of gas available per block of transactions. And as much as such a solution has caused endless disputes in the Bitcoin blockchain when it was first considered, on the Ethereum blockchain it does not pose any particular problem. The quantity of gas per block was increased by 12% in June 2020, following a vote of the miners, without much effect on the increase of the gas price, by the way. More fundamentally, this solution also presents scalability problems: the larger the blocks are, the more they require fast network connections, disk space to store the blockchain, and computing power to handle interactions with smart contracts. So this is not a long-term solution.

Ethereum 2.0

The Ethereum 2.0 blockchain, currently under development, has been built to overcome this kind of problem. In particular, by providing sharding systems allowing to cut the blockchain in several parts, it becomes possible to massively increase the number of simultaneous transactions, to reduce costs, and to solve scalability problems. Sadly, the widely expected release has not been announced yet. This would be ideal but a short-term solution is sorely needed.

Layer-2 and side chains

On the Bitcoin network, the Lightning Network protocol was built to solve this kind of scalability problem in the following way: instead of processing all the transactions on the blockchain, it allows the creation of subnets called channels in which it is possible to process many more transactions, with very low commissions.

So the idea is to build equivalent systems on Ethereum. The Matic protocol thus proposes to build side-chains, mini-blockchains connected to the main blockchain on which it is possible to perform the same operations as on the standard network, but in an isolated environment. It is then possible to transcribe the result of the transactions on the blockchain when the side-chain is closed.

The meta-blockchains

The last solution to consider is the use of meta-blockchains. These projects promise to embed existing protocols within their own blockchain, which is faster, more efficient, and less expensive. Protocols such as Polkadot, Cosmos, or Avalanche are the best known today, and would allow transactions to be executed across multiple blockchains, efficiently and quickly. Again, the problem is that these projects are currently in the development phase and require complex and unproven technologies.