Alas, poor gas fees, I knew them well
In the frenetic storm of crypto trading, speed and cost are king. If Bitcoin can be likened to gold, then Ethereum can be considered a new internet — Web 3.0.
Every interaction with the Ethereum smart contract incurs fees (termed gas), given to miners as rewards to incentivize mining on the network. Like any fledgling technology, ETH is a work in progress, albeit spanning global proportions. Since its creation in 2015 by Vitalik Buterin, Ethereum simply hasn’t scaled to accommodate the industry’s exponential growth, resulting in increased congestion and fees in excess of $100 for simple token swaps on the network. DeFi enthusiasts will no doubt remember the colossal blockage caused by last September’s Uniswap airdrop, where users of the decentralized exchange received 400 UNI per wallet address, causing the Ethereum network to grind to a halt, with transactions taking days to finalize as recipients looked to cash out their freshly minted tokens.
Bottlenecks such as this are the inevitable result of an auction-based fee structure, as has been employed by Ethereum. Simply put, miners are incentivized to volunteer their computing power by higher rewards. Ultimately, this means that those who can afford to pay the most will be prioritized on the network, while those not willing to pay exorbitant sums for moving tokens between wallets are pushed to the back of the queue — not quite in the spirit of inclusive decentralization.
Solving for scalability
Having recognized the severity of this issue, ETH’s army of developers have been tackling Ethereum’s scalability concerns with incremental upgrades leading up to the full-scale rollout of Ethereum 2.0. Front and center is the upcoming deployment of EIP-1559, which sounds like a Star Wars droid but is potentially a lot more useful.
EIP-1599, an Ethereum Improvement Protocol, does away with the current auction-based system, instead introducing a base fee that adapts based on network congestion, with an algorithm increasing or decreasing base fees as network usage fluctuates above and below 50%.
Unlike ETH’s current fee structure, the proposed base fee will be burned rather than awarded to miners in an effort to increase the asset’s scarcity. Users may still pay a premium “tip” to miners to prioritize their transaction. If implemented smoothly, the proposed tip system could prove far more efficient than current network protocols, allowing for flexible block size and introducing stopgaps that mean transactions could be confirmed in under a minute, rather than up to several hours on days of high usage.
Beeple (2020)
Fresh competition to dominate the new paradigm
Ethereum’s teething problems bring to mind the evolution of the internet over the past 3 decades. The network’s current efficiency can be likened to dial-up, making it a less-than-ideal sandbox for the burgeoning arena of DeFi, as prohibitive fees price users out of utilizing the network’s many dApps, tokens, and lending protocols. While EIP-1559 offers more accessibility for Ethereum’s user base, the technology underpinning the network remains far less dynamic than the offerings of other Layer 1 networks, such as Polkadot (DOT), Solana (SOL), Elrond (EGLD), and Fantom (FTM), among others.
While these novel networks offer essentially fee-less services, with sub-second finality and robust consensus mechanisms, their relative lack of reach may dissuade developers seeking more efficient playgrounds. As the chain wars rage on, it remains to be seen whether Ethereum can retain its sprawling community as projects eye greener, albeit smaller, pastures. Unlike the internet, Ethereum must adapt to compete with other rapidly developing technologies or risk falling by the wayside, as unfathomable as that might seem (Netscape, anyone?).
Unless?
While delays have plagued ETH’s ambitions for years, the upcoming deployment of EIP-1559 sounds an alarm to the rest of the industry — the high throughput, low-cost internet of value envisioned by Ether proponents may be closer than we think.