Ethereum has quickly become one of the most popular cryptocurrencies in the world. But its rising popularity has also led to some growing pains, including sky-high transaction fees on the network. For those new to Ethereum, seeing fees of $50+ just to send funds can be downright shocking. So why is using Ethereum so expensive right now?
There are a few key factors driving up the cost of doing business on the world’s second-largest blockchain.
Top Reason Why Charges of Ethereum Are so High
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Surging Demand Outpacing Capacity
One of the biggest reasons behind Ethereum’s high transaction fees is simply surging demand that is outpacing network capacity. Ethereum has a limit on the total transaction bandwidth it can handle at any time. But with more and more applications being built on top of Ethereum, and more users making transactions, that bandwidth limit ends up creating a bidding war for capacity.
When there are too many transactions trying to get included at once, users bid up the gas price (transaction fee) they are willing to pay to jump to the front of the line. Think of it like an auction house – when an in-demand item comes up for sale, those interested will keep bidding higher and higher amounts to make sure they walk away with the prize.
On Ethereum, transactions set a gas price and the ones willing to pay the most per unit of gas get priority treatment. So during times of peak demand, competing users drive these gas prices sky high to make sure their transactions aren’t stuck waiting. The average Ethereum gas price has soared over 2,300% from 2020 to 2022. Such surging fees make every transaction and smart contract execution very costly for users.
Growing Adoption of DeFi
A major source of the surging demand on Ethereum is the explosive growth in decentralized finance (DeFi) applications that all rely heavily on the network. DeFi platforms allow for crypto lending, borrowing, trading, derivatives, savings accounts, insurance and more – all from an open and transparent decentralized architecture without centralized intermediaries.
Many of the most popular DeFi applications are built on top of Ethereum, including leaders like Uniswap, Aave and Compound. Billions of dollars of crypto value is locked up in Ethereum DeFi apps. All the transactions flowing through these decentralized money markets end up creating a huge burden on the underlying Ethereum network itself in the form of fees.
Some DeFi applications also encourage aggressive speculative trading and transactions from bots/arbitrageurs trying to take advantage of fleeting arbitrage opportunities. This adds more competition for limited transaction capacity – further driving up the bid for gas and making every transaction more expensive.
The Success of NFTs
NFTs (non-fungible tokens) have become another major workload boon for the Ethereum network – especially in scaling up transaction fees. These digital collectibles took the world by storm in 2021, with billions of dollars of NFT art, music and more being sold.
NFTs rely on the Ethereum network to maintain a public record of their digital provenance and transaction history. But with the soaring volume of NFTs now being minted and sold, these activities alone can contribute significantly to Ethereum’s congestion issues. For example, the sale of Beeple’s record $69 million digital artwork involved heavy NFT bidding wars that used up over $6 million in gas fees.
As more artists and creators turn to NFTs as a new medium, these digital assets will require even more capacity from Ethereum – making transactions fees even pricier.
Competition for Block Space
Ethereum’s core blockchain has inherent limits on the total computation and transaction activity it can handle per block. Standard blocks on Ethereum can only hold a maximum of 15 million gas worth of transactions. But the average daily gas usage on Ethereum has exceeded 70 billion per day during some congested periods.
This huge gap between available block space and demand for that space is what creates constant competition between users over a scarce resource. Miners naturally select transactions with the highest gas prices, as that maximizes their profits from each block. With such an enormous glut of pending transactions, gas prices soar stratospheric until enough users drop out or capacity frees up.
Ethereum 2.0 aims to tackle this competition for finite block space through a scaling solution called sharding. But until these upgrades fully materialize, users will continue battling for the network’s limited computation and storage resources.
Speculation Driving Usage
Rampant speculation in cryptocurrencies is another indirect force that is bloating activity on Ethereum and driving up fees. When crypto assets see massive price runs from speculation, it tends to increase general interest and usage of DeFi trading/lending protocols built atop the network.
But most of this activity arises from short-term speculation rather than driving sustainable economic value. Traders swap between assets hundreds of times per day, force liquidations via flash loans, trigger unnecessary smart contract calls, and overload the Ethereum mempool because profits outweigh the transaction costs.
This speculative-driven usage contributes significantly to congestion while offering little long-term value. But as long as trading schemes are profitable, Ethereum serves as the underlying playground to enable them – putting further pressure on fees.
Difficulty Spikes from Mining Hash Rate
An underdiscussed technical factor that can sometimes exacerbate Ethereum’s high fees is difficulty spikes caused by sudden drops in mining hash rate on the network. Ethereum, like Bitcoin, adjusts the mining difficulty every 2 weeks or so to ensure an average block production time of 12 seconds.
When a significant portion of Ethereum miners suddenly go offline, this difficulty adjustment kicks in to account for the drop in hash rate to normalize block production speeds. The resulting difficulty spike reduces the efficiency of all the remaining miners.
With mining marginally less productive, there is subsequently less space for transactions included in blocks even at the same gas limits. This reduced capacity contributes to congestion and results in users having to bid fees even higher to get included. These difficulty spikes have contributed to some sharp pop-ups in gas costs.
Longer-Term Solutions Under Development
While Ethereum’s sky-high fees may seem unattractive for newer users, it helps to remember that this is a temporary growing pain stemming from the platform’s huge success. The Ethereum roadmap includes upgrades like sharding and proof-of-stake consensus that should drastically increase throughput and reduce fee pressure and blockchain bloat.
But these fundamental upgrades take time to develop, audit and launch in a decentralized manner. In the meantime, impatient traders and DeFi users are cramming as much activity as they can onto Ethereum regardless of the fees.
There are also Layer 2 solutions launching that enable high throughput and low fees while still settling to Ethereum’s security. Once more activity migrates to these Layer 2 systems, fee pressure on Layer 1 should ease considerably.
So in the near-term, there’s no quick fix for Ethereum’s limited capacity and the resulting high fees. But the future looks bright. Ethereum remains the dominant smart contract blockchain for a reason – it has the most developers, network effects and applications built atop it. And overtime, upgrades and scaling solutions will help bring fees back down to more reasonable levels for users. But for now, degens gotta pay the high tolls if they want to play around in Ethereum’s crowded DeFi casino.
Conclusion
Ethereum has become a victim of its own success as congestion issues from surging adoption continue to push transaction fees to painful levels. But work is already underway on multiple technical fronts to increase capacity through sharding, rollups and other Layer 2 infrastructure.
There is no quick fix that can instantly lower gas prices back down to pennies. However, the long-term solutions under development aim to permanently resolve these capacity constraints and reduce fee pressure. Ethereum still has the most vibrant developer ecosystem even with congestion issues. And overtime, upgrades will help onboard new users at scale – without $50+ fees just to move ETH around or interact with a dApp.
In the meantime, users should be strategic in optimizing transaction fees by carefully setting gas limits, using ERC-20 transfers instead of ETH transfers, batching payments, or buffering with stablecoins. While the current fee situation is untenable for regular users and small transactions, the Ethereum roadmap should restore reasonable costs as capacity expands and upgrades roll out over the next 1-2 years.
Frequently Asked Questions
What is the main reason behind Ethereum’s high transaction fees?
The core reason for Ethereum’s high fees is surging demand that is outpacing network capacity limits. More users and applications competing for limited transaction bandwidth drives up gas prices as users bid against each other.
How are DeFi and NFTs contributing to Ethereum congestion?
Explosive growth in DeFi and NFT activity adds enormous transaction volume to Ethereum. All the lending, trading, minting and speculation drives more demand – resulting in pricier fees and slower confirmation times.
Why can’t miners just expand Ethereum’s capacity?
Ethereum’s base layer has inherent limits on computation and block space. Miners cannot unilaterally change parameters like block size or gas limits without network upgrades.
Are Ethereum’s fees always high, or do they fluctuate?
Fees tend to spike during periods of peak congestion and decline during lulls. But overall, the trend has been towards more demand and pricier average fees on Ethereum.
Does network difficulty affect Ethereum’s transaction capacity?
Yes, difficulty spikes caused by drops in mining hash rate reduce network efficiency and available block space. This shrinks capacity and pushes fees higher.
Will upgrades like sharding definitively fix Ethereum’s fees?
Yes, upgrades like sharding are intended to drastically expand Ethereum’s throughput by orders of magnitude – reducing competition for space and gas costs. But these are still years away.
Can Layer 2 scaling provide any near-term fee relief?
Yes, Layer 2 solutions can help shift activity off of Layer 1 and aggregate transactions. This eases congestion and drops L1 fees substantially. However, adoption is still growing.
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