High GAS fees for on-chain transactions: can we fix it in time?

If you read Bitcoin’s original whitepaper quickly, you’ll find that part of Satoshi’s “selling point” was about the “ultimate reduction in financial intermediation costs” that Bitcoin made possible.

To use the exact words used by Satoshi: “The cost of mediation increases transaction costs, limiting the practical minimum size of the transaction. ”

This was written explaining the inherent cost of traditional transaction systems as opposed to what Bitcoin offered.

Unfortunately, in reality, transactions on proof of work (PoW) networks – like Bitcoin and Ethereum – are still trapped in a quagmire of high transaction fees. It’s quite ironic considering the case originally made by Satoshi.

For those new to blockchain investing, high transaction fees are something you’ve probably been faced with before.

That being said, this was not the case in the early days of cryptocurrencies, on pioneer networks like Bitcoin and Ethereum.

The problem of “the origin of the costs”

As you may know, one of the flaws of pioneering blockchain protocols is that miners have the freedom to select the transactions they have validated based on the amount of fees for those transactions.

More so, with huge transactions accumulated in the memory pools of networks like Bitcoin and Ethereum, the laws of supply and demand almost always skyrocket network fees or “gas fees” for Ethereum. .

For example, when looking at Ethereum’s network activities – while comparing network traffic and transaction fees – it’s easy to see this happening.

This is similar to when the scarcity and high demand for a particular concert ticket pushes ticket prices through the roof.

Now that we’ve had a quick look at the state of cryptocurrency fees, it’s time to take a look at some of the “types of fees” we all face when dealing with cryptocurrencies.

Examine network charges with on-chain transactions

In August 2020, the average fee per transaction on the Ethereum network hit a record high of $ 6.04.

That’s the highest we’ve seen since 2015. Experts say the surge in fees has coincided with the boom in activities of decentralized financial protocols like Uniswap.

As if that weren’t enough, Ethereum network fees rose 470%, hitting a new high on May 11.

According to various reports, a single swap transaction reached $ 300.

As you may know, any time you send crypto assets from your wallet to another recipient wallet address, you incur transaction fees or “network fees,” as many choose to call it. This assumes that the wallet is not on a centralized exchange like Binance or Coinbase, which is technically done. off-chain.

That being said, the exact fee you end up paying for each cryptocurrency transaction depends on the network consensus protocol you are using. and traffic on this network.

For example, a Bitcoin or Ethereum transaction (which uses PoW for consensus) will have totally different fees of say Cardano or the Binance smart chain (which uses Proof of Stake (PoS) for consensus).

While PoW networks have higher fees, especially as the network grows in volume, PoS networks have lower fees.

However, most of the earlier networks weren’t built that way and are struggling to change. For Ethereum, a full switch to version 2.0 (which uses PoS) will take around two years.

For the most part, popular networks like Ethereum will continue to have network fee issues, which requires a practical solution.

While we aspire to autonomous and autonomous decentralized financial products, the cost associated with such chain level transactions is difficult to address.

Emerging responses to the challenge of high transaction fees

Following the astronomical increase in the adoption of DeFi and NFT – and the effect on the price of fees – answers are emerging to this problem.

Some of these responses include the introduction of entirely new blockchains like Binance Smart Chain, Polkadot, etc. which have also received quite a reception.

That being said, there still remains the issue of isolation, network security, true decentralization, and backward compatibility with existing decentralized services already built on the Ethereum network. They are closely linked to the existing economy.

Optimistically, the implementation of Ethereum 2.0 – while still in progress – will soon make the transaction fee conundrum a thing of the past.

There are already a few ETH2.0 solutions that optimize a sensation-free environment, both for DeFi and NFT products.

For example: Cryption Network is already building an exchange that allows gas-free DeFi transactions on the Ethereum network.

This will allow DeFi traders to finally trade gas free.

An Overview of Fees on Off-Chain Cryptocurrency Exchanges

Whenever you decide to buy a crypto asset, you need to buy it from someone who is willing to sell.

Since exchanges (either centralized or decentralized) facilitate these markets, they are the entry point for cryptocurrency purchases.

Whether you want to trade your crypto wallet for other assets or convert your fiat currencies into digital assets, an exchange is the cheapest and most convenient way to trade cryptocurrencies.

Unlike direct trading, exchanges offer users the oversight of an escrow system and also liquidity that you won’t find in peer-to-peer trading across chains. However, this comes at the cost of losing control of your funds.

You know what they say about private keys: “Not your key, not your funds”.

It should also be noted here that DeFi exchanges give you the privilege of full sovereignty and some liquidity. However, since they are on-chain, the fees are still high.

That being said, exchange services are not provided for free by exchanges. So, to generate some kind of income, they charge a user fee on every trade executed on their exchange.

These fees are what makes operating an exchange profitable for owners.

In addition, with centralized exchanges (CEX), each transaction is carried out off-chain on an exchange order book. This is pretty superficial and is technically not a blockchain transaction, as it leaves traders exposed to all of the counterparty risks associated with relying on a third party.

Conclusion

The core transaction fees aren’t such a bad thing, especially when you factor in the need for security on a decentralized platform. These types of incentives allow minors to continue working.

But with transaction fee prices soaring, especially on the Ethereum network, this space is hungry for alternatives (which we are already seeing).

Currently, the decentralized Ethereum network is the most expensive chain to process and operate, when it comes to gas charges. Fortunately, with the implementation of PoS, the cost issues will be significantly reduced.

In addition, there is the increasing adoption of chain bridge technology, which enables interoperability between the chains of DeFi projects.

With this technology, we will see a more harmonious, liquid and efficient space, rather than isolated blockchain technologies trapped in their separate worlds.

Warning:

The author has no direct interest in the projects mentioned above.

The opinions expressed in this article are the sole responsibility of the author. Nothing in this article constitutes investment advice. Please do your own thorough research before making any investment decisions.

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