Ethereum Fees Are Back to Where They Were

Project Reviews May 11, 2021

As the title suggests, Ethereum fees have managed to make a roaring comeback to the levels where they were at previously - which is a bit concerning for Ethereum proponents as this signals that the on-chain battle between usability and gas rates has not been postponed for as long as advocates were originally hoping.

Ethereum Raising the GWEI Limit

For the past several weeks, many have complained about the general gas rate for Ethereum.

For those unaware, transactions on Ethereum are different from Bitcoin in that there is a certain amount of 'gas' necessary to "fuel" the transaction's computation on the blockchain by various miners.

Since Ethereum has so many different types of transactions (in comparison to Bitcoin) due to its 'EVM' (Ethereum Virtual Machine) construction, there is no uniform calculation for how much a certain transaction might "cost" someone (in terms of the fee that must be paid) in order to be confirmed on the Ethereum blockchain.

Below is a screenshot showing the going rates for various Ethereum transactions as of May 11th, 2021, 1:26 a.m. UTC.

The photo above shows us a ton of information, but to simplify, if we look at the bottom we'll see three different types of transactions underneath a section where it says, 'Estimated Cost of Transfers & Interactions':

Those three different transaction types are:

  • ERC20 Transfer
  • Uniswap Swap
  • Uniswap Add/Remove LP

Each different transaction type requires a different amount of 'gas' on average to fuel the computation of the transaction.

Unlike Bitcoin, there is a minimal amount of gas that must be paid in order to fuel certain transactions at all. If users fail to provide enough gas to complete the computation, then not only will the transaction fail, the user that attempted to complete the transaction will lose all of the money for gas that they included along with the transaction (that's no bueno).

However, that does not mean that users are locked into paying one price to complete their transaction - there is some leeway. As one can see in the transaction above, there are different rates for each transaction type contingent on whether the user is willing to wait for a "long" time (relatively speaking to other TX confirmation times on the protocol) or must have their TX confirmed immediately (this is particularly important in instances where users are vying with others for a 'scarce' / 'finite' asset on the protocol that gets doled out on a first come, first serve basis).

Thus, the screenshot presented above was shown to give readers a sense for what the 'going rate' is on Ethereum at the time of publication (late hours of May 10th, 2021 EST; GMT -5).

The estimated rates on etherscan.io are calculated by looking at the gas rates paid by transactions in former blocks (as well as their accompanying confirmation times).

Peeking at the Top 'Gas Guzzlers' For Ethereum

Before moving on, let's take a quick look at the top 'gas guzzlers' for Ethereum:

This stat, provided by etherscan.io shows us the smart contracts that have consumed the most gas over the past 24 hours (lookback from any given point in time that the page is loaded).

Notably, the 'Uniswap V2: Router 2' smart contract is responsible for the greatest utilization of gas on the Ethereum protocol over the past 24 hours. There's nothing novel about this fact, in itself. However, the total value (in USD) of gas that this smart contract has crunched over the past 24 hours is something that is worth noting.

According to Etherscan.io (shown above), this smart contract is responsible for generating over $3.6 million USD worth of gas payments in the past 24 hours.

Gaining Some Perspective

While the above statistics may be helpful in gaining some understanding of the current fee rate situation on Ethereum, all of the information above is meaningless without context.

Specifically, we need to know whether these gas rates are higher or lower than they have been in the past.

Specifically, we're going to go back  to the 'gas guzzlers' list that we were looking at previously to see if we can't draw a solid comparison between funds generated from this smart contract just a week ago in comparison to now.

For reference, this is what the current 'gas guzzlers' list on Etherscan.io looks like currently:

Breaking Down the Uniswap V2 Router02 Statistics

Fortunately for us, Etherscan.io provides a section on their website users can visit to glean more granular, historical data regarding the overall gas 'guzzled' by this particular smart contract.

For reference, the smart contract being analyzed as the 'Uniswap V2 Router02' contract's address is: 0x7a250d5630b4cf539739df2c5dacb4c659f2488d.

If we check out days prior on the graph (May 1st-7th/8th, 2021), we can see that the overall gas guzzled by the smart contract was nowhere near as much as it is now (see below):

In the chart above, we can see that the total fees (in gas) generated by the contract was only $3.175M on May 2nd, 2021 (just a little over a week ago).

Now let's take a look at what the total fees over the past 24H from the time of publication (May 11th, 2:00-2:30 a.m. UTC):

In comparing the total gas usage for this smart contract from May 2nd to May 10th, 2021 (8-day difference), we can see the following changes:

  1. The total USD in gas used by this smart contract increased by over six-fold (from $3.175M to $20.307M over a given 24-hour period).
  2. The raw increase in Ethereum used for gas fees by the smart contract from May 2nd to May 10th, 2021 increased from 935 to 5195 (an approx. 5.5x increase). This shows that, while the increase in Ethereum' s  price did play somewhat of a role in the increased gas fees paid by those interacting with this smart contract, it was far from the defining factor underpinning said increase.

Given the information we extracted above, the next logical point of analysis would be to check what changes there were (if any) involving the smart contract (i.e., via calls, etc.) from May 2nd to May 10th.

The reason for this is because the analytics that we've viewed so far have only given us aggregate totals for the amount of gas 'guzzled' by this specific Uniswap contract. Earlier in this write-up, we established that certain transactions on the Ethereum protocol must include a minimum amount of gas in order to be fulfilled and included within a future block (reminder FYI:the total gas paid per TX on Ethereum must first satisfy a minimum based on the total amount of computation required by the proposed transaction; secondary to this calculations are fee hikes contingent on how soon one wishes to have this transaction confirmed on the Ethereum blockchain).

Thus,  if there were significantly more transactions on May 10th, 2021 vs. May 2nd, 2021, then this would indicate the possibility that a greater usage of the smart contract by Ethereum users was responsible for the vast increase in aggregate fees accrued over a given 24H period vs. an overall hike in the rate paid per TX uniformly across the protocol.

Below is a look at the total # of transactions on Ethereum on May 2nd, 2021, involving the Uniswap V2 Router02 Smart Contract (data extracted from bloxy.info):

As we can see above, there were 163k total calls upon this contract on May 2nd,  2021

Below is a look at the total # of transactions on Ethereum on May 10th, 2021, involving the Uniswap V2 Router02 Smart Contract (data extracted from bloxy.info):

As we can see above, there were 163k total calls upon this contract on May 10th, 2021

Coincidentally, there were an equivalent # of calls made upon this contract on May 2nd, 2021 as there were on May 10th, 2021.

So we can attribute the increase in aggregate gas paid by this smart contract entirely to an overall increase in the gas rate for Ethereum during that span (May 2nd-May 10th, 2021).

Why Are We Shocked By These Numbers?

The reason why these numbers are somewhat shocking is because there was a vote recently on the Ethereum protocol to increase the limit for how much gas can be included in a given block.

The following article by CoinDesk encapsulates the situation thoroughly:

https://www.coindesk.com/ethereum-gas-limit-eth-price-soars

The article, published on April 27th, 2021, summarizes the protocol decision enacted after a general consensus was signaled by miners on the Ethereum protocol.

This specific protocol change took place on the 12290600th published block (April 22nd, 2021; circa 2:34 a.m. UTC):

https://etherscan.io/block/12290600 (part one)
https://etherscan.io/block/12290600 (part two)

As the screenshots show above, the gas limit for that block was 15 million gwei vs. 12.5 million gwei (previous limit; approximate +20% increase).

Rationale Behind the Decision By Miners

The logic underpinning this decision was fairly straightforward.

Ethereum, like Bitcoin and nearly every other blockchain protocol, prices its fees in its native asset (or in that of another cryptocurrency). Thus, even if the overall fee rate does not increase, the overall USD paid in fees will if the spot price of the underlying asset increases on various cryptocurrency exchanges (i.e., Binance, Coinbase, Bittrex, etc.).

Thus, the dilemma that many developers and miners have been faced with is finding a balance that allows users to embrace protocol appreciating in price (something that mostly everyone wants) without compromising the usability of the project itself (i.e., in Ethereum's case, fees had become so exorbitant that users were deterred from making transactions of any sort on the protocol).

Why Raising the Overall Limit Would Make a Difference

For those that are adherents to the Keynesian theory of Economics, the following concepts / ideas should seem largely intuitive.

If you're not (or don't know who Keynes was/is, never fear - we'll break this down in an ELI5 format below).

The logic for raising the gas limit / block is as follows:

  1. As Ethereum has grown in popularity, so has the actual use of the protocol.
  2. With this increased utilization of the protocol, there are an increasing # of users that wish to have their transactions confirmed as soon as possible (especially those that are interacting with DEX protocols / ecosystems [as price ordering is often done on a first-come, first-serve basis]).
  3. By limiting the total amount of gwei that can be included in a given block, we now make the maximum potential space allotted for a transaction a 'scarce' asset (in a sense; more so on a 'rolling basis', since every block we start anew).
  4. Thus, if there are more users looking to have their transactions confirmed within the next block then what's their space allotted for, then inclusion in the next published block on the protocol becomes contingent on the transactions with the greatest fee rate attached to them (up to 12.5M gwei before the adjustment to 15M gwei).
  5. However, if the limit were raised, then more transactions could be included in a given block, which would increase the 'load' on the chain in terms of individual node specifications necessary to maintain at least a 'pruned' copy of the chain; but for miners including these transactions within a given block, the increase in "work" necessary to do so would be negligible at best.
  6. Thus, if the limit were raised, there was always a significant possibility that the total profits for miners would increase even in spite of an overall decrease in the gas paid by each transaction included within a given block.

This logic (outlined above), is what primarily fueled advocacy and eventual execution of an increased gas limit (per block) by miners on the protocol.

Vitalik Buterin Gave His Blessings on This Protocol Change

As referenced in the above-cited CoinDesk article, Vitalik Buterin had chimed in on the issue in the hours and days beforehand, to publicly state his approval of raising the total limit.

Its worth noting that although Vitalik Buterin is far from the sole architect of Ethereum (as a protocol), many still see him as the de facto (creator) and figurehead of the protocol. Therefore, his advocacy of certain ideas and proposals (especially in such a public manner), tend to have significant influence over whether that idea is considered palatable by the general Ethereum community (though this is not always the case, as evidenced by the Vitalik + Ethereum Foundation's decision to roll back the protocol in 2016 to 'reverse' the transactions issued in the 'wake' of the infamous "DAO hack").

Below is a screenshot of Vitalik's post on the 'r/ethereum' subreddit on April 15th, 2021:

Premature Championing of the Measure as a 'Solution' For Ethereum

Ultimately, increasing the gas limit per block was never meant to be a final solution of any sort to the rapidly increasing gas fees (per block).

However, many did see it as a measure that would at least buy Ethereum developers a few months (at least), to conjure up an adequate long-term solution to solve this burgeoning issue.

Below is a tweet that typifies the general perspective of many Ethereum proponents shortly after the decision to increase the gas limit went live (and was publicized):

As shown in the above tweet, the individual publishes the gas rates current for at that time (May 4th, 2021; 5:27 a.m. UTC).

However, as we now see, this situation has changed drastically in a little over a week.

Using the same site the Twitter user used to curate the tweet's attached photo of contemporary gas rates, we can see that the quotes have risen by nearly 10-fold in less than a week:

If we probe further on the site, we can see that the gas fee troubles started recently (circa May 8th, 2021).

Before that point, average gas rates for a 'rapid transaction' (one that the site estimates would be included in the next immediate block based on prior on-chain data), were well below where they were in weeks past:

Data by 'ycharts' supports this observation as well.

Looking at the re-published chart below from ycharts (of average gas rates / day for $ETH), we can see that there was a period of time between April 22nd, 2021 (when the limit finally peaked with the new limit of 15M GWEI / block) to May 7th-8th, 2021, where the average gas rate was significantly lower than what it had been in the days / weeks prior:

However, this general pattern has all but reversed-course over the previous couple of days:

Conclusion

Ethereum may be in a bit of trouble since the alleviation of gas fees (USD value) for the protocol's users has been touted as one of the main catalysts for the recent bullish price action for Ethereum.

Specifically, if we go and check Ethereum's price since April 22nd, 2021 (when this change went into effect), we can see an undeniable spurt of strong bullish activity:

As we can see from the chart above, in the time since this change was finalized on the Ethereum protocol (a little under 3 weeks), the price of $ETH has appreciated by approx. 65% or so (right to the time of publication).

As to whether these gains hold in light of the obvious revelation that the fees have returned back to where they were before the limit was increased, remains to be seen.

In subsequent issues, we'll start looking at additional factors holding the price of Ethereum in place that may contribute to its 'staying power', even in spite of the apparent failure of the gas-limit-increase initiative.

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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