How to solve the problem of high fees on the Ethereum network?

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The Ethereum network continues to suffer from scaling issues.  In July, transaction fees in Ethereum hit their highest levels in the p...

The Ethereum network continues to suffer from scaling issues. In July, transaction fees in Ethereum hit their highest levels in the past two years. The average transaction fee was $ 1.5 and fees continue to rise. This makes the network too expensive to use when sending transactions, using dApps and DeFi protocols, which negatively affects its development, more mass adoption and security. The problem is spiraling out of control, but there is still no quick and clear solution. Why transactions in Ethereum have risen so much in price, how to cope with the problem, and why it can take months or even years, we understand the material.

Why Ethereum Transaction Costs Rise

Abnormally high fees have been observed in Ethereum for several months now.
Recall that in Ethereum, the size of commissions is measured in gas ("gas") - the unit of payment for transactions, execution of smart contracts and actions in dApps. That is, for any action on the network, the miners must be paid a certain amount of gas, calculated by the user himself. But the final gas price is determined by the free market or auction - the higher the demand for an action, such as a transaction, the higher the gas price. The more activity on the Ethereum network, the more expensive transactions in it become.
According  to data  aggregator Etherscan, on July 26, the network used more than 78 billion gas - a record figure when measured in gas (but not in dollar terms).
A graph of the growth in the amount of gas used in Ethereum, according to Etherscan. Source .
According  to  ETH Gas Station, at the time the article was published, the recommended gas prices are 85 gway, or $ 0.58 for a standard transaction, for an accelerated transaction - 94 gway ($ 0.64), but earlier prices reached 100 gway ($ 0.68). At the beginning of the month, a standard transaction cost 47 gway, and at the beginning of the year 10-12 gway.
At the same time, according  to the  YCharts service, on July 26, the average cost of a transaction for one ETH was $ 1.5. Since July last year, this indicator has grown 13 times, since the beginning of the year - 15.5 times, and since the beginning of July - almost twice. Moreover, sending ERC20 tokens and calling smart contracts can cost several times more. For example, the commission for opening a deposit or a trade transaction in the DeFi protocol will be from $ 5 to $ 15.
ETH transaction cost graph, according to YCharts. Source .
There are several reasons for the surge in transaction costs. According to  DappRadar's findings, Tether's stablecoin turnover and a number of "high-risk" dApps cause "the effect of blockchain spam and are the main consumers of gas ." The active use of DeFi-protocols, as well as Yield Farming (income pharming) load the network, which inevitably leads to higher transaction prices. Tether's ongoing transition to the ERC20 standard is also loading the network. Stablecoin is one of the main consumers of gas. According  to  EthGasStation, stablecoin-related transaction costs were $ 2.18 million in July. The stablecoin issuer is  trying to  solve the problem through the Omise Network's sidechain solution, but even if successful, it will take some time.
Largest gas consumers in the last 30 days, according to Ethgasstation.info. Source .

How the growth of fees affects the development of Ethereum

The crypto community is convinced that the high cost of transactions is slowing down the development of Ethereum. After all, it initially became popular precisely due to the ability to cheaply make microtransactions. The high fees make the network too expensive for gaming applications, NFT tokens and DeFi applications that rely on a large number of low-cost microtransactions. With such prices, transactions in them simply lose their economic feasibility.
Thus, Ethereum and the projects based on it again face the problem of network scaling and are not ready for more mass adoption. After all, high commissions keep users with a small budget from participating in many interesting protocols.
The fee increase has a significant impact on activity in gaming dApps. DappRadar statistics  show that gaming activity on the Ethereum network plummeted 83% in May, while other networks saw little growth. Source .
Also, high fees affect the security of the network - expensive transactions can lead to the problem of  "selfish mining" . In this case, miners do not release blocks immediately after they are discovered and may receive a higher reward - the transaction fee may exceed the block reward. This negatively affects the processing of transactions on the network.
The Ethereum community and developers recognize that these high fees are an issue that needs to be addressed. There are several ways to solve it, but they all take time to implement.

Gas limit increase

The simplest solution is to increase the gas limit, which determines the capacity of the network. Unlike the Bitcoin network, which has a fixed block size, in Ethereum the block size depends on the gas limit. Therefore, Ethereum has restrictions on transaction fees - only a certain amount of gas can be paid for each block. However, miners can raise the limits by increasing the gas limit in each block by a small amount. A larger limit allows more transactions to be included in each block, which increases the network bandwidth.
Since May, some developers and miners have suggested increasing the gas limit or block size. So, the 1inch exchange, which became one of the initiators of the increase in this indicator,  urged to  immediately increase the gas limit to 25 million. In response, Vitalik Buterin suggested  limiting the amount  to 12-15 million, noting that “ many developers of Ethereum clients are concerned about risks even at these levels". His fears are related to the possible overload of nodes operating in the network. Operations that cost little gas but require a lot of resources can be used to attack network nodes. Thus, increasing the gas limit carries the risk that weaker nodes will be kicked out of the network as they can no longer process transactions - this will make the network less decentralized. Therefore, the limit should be increased gradually.
Buterin also  proposed  an alternative solution to the problem - to change gas prices for some types of settlements, for example, the base transaction cost and storage operations. In his opinion, this could increase the network capacity by about 20%. However, this would require a hard fork of the network, which is much more difficult than convincing the mining community to raise the gas limit.
Another possible risk of raising the gas limit is that miners will take longer to process each block. As this time increases, miners will have to work extra in order to receive block verification rewards. As a result, less efficient miners will capitulate, and as the hash rate decreases, the network becomes less secure.
At the end of June, the miners were able to agree and  raised  the gas limit from 10 million to 12.5 million. This gave the network an additional increase in capacity by 25% - the miners  were able to  process 44 transactions per second instead of 35, but this did not reduce the commission fees. The last increase in the gas limit was the fifth in the history of Ethereum. Each time after it, gas prices remained the same or rose again. The previous increase in the limit from 8 to 10 million  occurred  in September 2019, but then this also did not change the situation.

Second level solutions

Another possible solution to the problem of growing commissions is the use of second-level solutions, analogs of the Lightning Network in the Bitcoin network. These are structures that allow the creation of additional blockchains (sidechains) on top of the main network. As a result, only transaction results are written to the network.
Ethereum developers have been working on the Plasma solution for several years, but they have  not been able  to achieve its stable and reliable operation. Upgraded versions of Plasma from third-party developers are much more popular now: for example, Omise Network, Starkware or MATIC Network, Optimistic Rollup solution from Optimism (formerly Plasma Group), Synthetix solution, TrueBit, Raiden, Counterfactual, as well as solutions from the Fuel Labs and Connext teams ... However, most of them are either in beta or are not showing the desired results.

EIP-1559 Protocol Update

Upgrading the transaction fee system could also be a solution to the problem of high fees. So, Vitalik Buterin  is  in favor of activating the EIP-1559 update  , which he co-authored. It lowers transaction costs in Ethereum by replacing the current transaction costing auction model with a base commission automatically calculated based on the overall network congestion and a bonus tip to miners.
“Transaction fee revenue is currently approaching half of block reward revenue. This is the actual risk of making Ethereum less secure. See the link for an explanation The reform of the commission system (i.e. EIP-1559) corrects this. This is another reason why this EIP is important, "Ethereum creator Vitalik Buterin wrote on Twitter.
EIP-1559 solves two problems at once: dynamically changes the block size depending on the number of transactions in the queue and sets prices for specific users when demand becomes too high. The base fee will be at a given level, depending on the conditions of the network, while the tip compensates the miners for their work and can be increased to “skip” any series of transactions. The analogue of this is a regulated highway, on which lanes can be opened and closed as needed. In addition, there is a fast lane on this road, for which you can pay extra if you are in a hurry.
It is also envisaged to increase the gas limit from the current 12.5 million to 16 million. The size of the base commission will depend on the amount of gas used: more than 10 million - the commission will grow, less - it will decrease. EIP-1559 can also add a deflationary mechanism to the network: the base fee in the ETH is burned every time a transaction is made, and miners will only have a tip.
EIP-1559 is not the only possible Ethereum update to address the fee issue. EIP-2593 , written by MetaMask developer Dan Finlay, maintains the current transaction fee model by offering an " escalator algorithm " that allows users to change their fee structure based on their relative needs. The update allows the user to fine-tune the transaction fee to the lowest possible amount, slowly increasing the transaction fee until the miner decides to include it in the next block. The Ethereum developers liked this idea so much that EIP-2593 will most likely be used in addition to EIP-1559 as a tweak to the tip function.
Part of the Ethereum developers and project teams are already working on implementing the update and have even  launched a  test network. However, implementation of the update by at least the end of this year is unlikely, and the Ethereum community has  no clear consensus  on how to reform the fees. In addition, the proposal is still in its early stages of development and there is still no guarantee that EIP-1559 will be adopted by the Ethereum network. And even if it is implemented, there is no clear timetable as to when it will happen. If Ethereum 2.0 still launches at the end of the year, or at least next year, then the implementation of EIP-1559 may simply become irrelevant.

Ethereum 2.0 launch

High fees are just a consequence of the Ethereum scaling problem. It is intended to solve it by upgrading to the state of Ethereum 2.0, in which the issue of huge commissions will disappear altogether, because payment processing will go from miners to validators. The network will be based on steaks - deposits from 32 ETH, allowing you to receive passive income.
The Ethereum 2.0 launch could still take place before the end of this year, although the chances are diminishing. Medalla's final testnet  will be ready  for launch on August 4th in case 16,384 validators block 524,288 test coins for staking. If this happens, developers will be able to start implementing phase zero of Ethereum 2.0 before the end of the year.
However, even the long-awaited launch of Ethereum 2.0 will not immediately solve the problem of high commissions. According  to  Vitalik Buterin, major updates that will make Ethereum more scalable will be implemented within two years, and until then the ZK-rollups technology will become the main technology for scaling the network. Until apps start using it, Ethereum fees will continue to grow.

Finally

Network congestion and, as a result, high fees show how popular Ethereum has become as an ecosystem in the cryptocurrency space. Even despite the growth in transaction costs, the ETH rate has grown since the beginning of the year by 250%, from the March minimum - by 280%, and since the beginning of July - by 43%.
The rise in the rate reflects the belief of users that the Ethereum blockchain will continue to be widely used. So far, for them, the benefits of the network outweigh all the disadvantages. Also, the rapid growth of DeFi applications and the expectation of an upgrade to Ethereum 2.0 are likely to play a big role in the growth of the ETH value.
However, the situation may change. The main problem with Ethereum is scalability: the blockchain is getting busier, transactions are getting slower, and the cost of gas is getting higher. There are no quick options for solving it; they will all take months or even years. All this time the use of the network and, therefore, the cost of gas will only grow. The network capabilities may not be enough for the dApps working on it, and because of this, Ethereum may lose its status of the market leader, because competitors are on the heels of the company. So far, none of the many Ethereum killers have achieved this goal, but the prohibitively high fees give them a great chance to overthrow the “tokenization king”.

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