Ethereum (ETH) fees hit a new an all-time high, with its supporters arguing it’s a proof of high demand, while Ethereum moves towards a new Layer 2 (L2) scaling solution.
Ethereum has been experiencing significantly high fees on and off for several months now, particularly with the decentralized finance (DeFi) boom last summer. And it has reached yet another all-time high as a result of a major jump from January 1’s USD 1.68 to yesterday’s median fee of USD 8.5. The previous all-time high happened last September when the median transaction fee had hit USD 8.48.
In comparison, looking at the network’s entire history, the only major spike it had seen before the late 2020/early 2021 highs was recorded in January 2018 – and it was USD 3.14. Meanwhile, as the fee currently stands at USD 5.41, ETH’s price went up 8.7% in a day and nearly 42% in a week, to USD 1,036 (at UTC 11:20).
And as expected people have noticed how much money they spend on fees alone. Crypto-asset trader Josh Rager, for example, claimed to have spent USD 125,000 “in gas fees this year at the current ETH price,” adding that “when Ethereum hits [USD] 5k, I’m going to be sick to my stomach.” To this, however, tax platform TokenTax replied that gas fees on trade can generally speaking be deducted from taxes, that is “added to cost basis which reduces gains and taxes,” while farming fees, similar to mining fees, can be a business expense.
Meanwhile, Matteo Leibowitz, strategy lead at Uniswap Protocol (UNI), jokingly tweeted: “the Uniswap paradox: Uniswap is ‘unusable’ because so many people are using Uniswap.” Uniswap founder Hayden Adams also said that scaling is “a huge problem” and that it “sucks [that] small transactions are sometimes priced out during volatility,” but that “the high gas costs are a direct result of a huge demand for trading on Uniswap.”
But per Tushar Jain, managing partner at crypto fund Multicoin Capital, Ethereum is “suffering from anti-network effects,” and each new user “makes the system less usable for other users by crowding them out,” adding that DeFi has outgrown Ethereum. And while some argue that newcomers are chased away by high fees and Plutus21 Capital Partner Richard Raizes argued that “high fees are nothing to be proud of,” SetProtocol product marketing manager Anthony Sassano claimed that “high fees signal extreme demand to use the Ethereum blockchain – we should be very proud of this as a community.” Other commenters chimed in, saying that fees are “the best evidence” of how much people are willing to pay to use the network.
Ethereum is the 👑 pic.twitter.com/eDpP06L3WU
— Anthony Sassano | sassal.eth 🏴 (@sassal0x) January 5, 2021
“High fees (in the context of the entire network) are absolutely a great thing for chain security,” programmer ‘jimmy’ said. “I’m empathetic to individual users who’re priced out, but scale or die has always been the mission. L2 upgrades are the next big step for the protocol to reach escape velocity.”
Speaking of which… While this has been happening, Ethereum’s Layer 2 scaling solution developer Optimism has been preparing to release its preliminary mainnet on January 15, they said in their January 1 post. With it, Ethereum smart contracts will be converted to Optimistic Virtual Machine (OVM) – “a scalable form of the EVM [Ethereum Virtual Machine]” – and deployed onto mainnet.
Two weeks prior, the team completed the final phase of their Optimistic Ethereum testnet, and also froze their code in order to prepare for a preliminary mainnet trial run with decentralized exchange protocol Synthetix (SNX). They expect the community release on March 15, opening the public testnet for all. Expecting outages and bugs, and with real value at stake, they said, “we will have a number of failsafes in place” and will be “holding upgrade keys for a while (at least the first 6 months) to ensure the safety of user funds. Until we relinquish those keys, please do not consider this the full and final system.”
As a reminder, Layer 1 refers to the Ethereum blockchain, while Layer 2 is any protocol built on top of Ethereum. Still, some, like Jain, seem to doubt L2 solutions will make a difference.
Layer 2 has potential to scale Ethereum and I’m excited to watch that play out.
But tbh I don’t think there is a big difference between moving to an L2 and moving to another L1.
— Tushar Jain (@TusharJain_) January 4, 2021
Meanwhile, OpenLaw CEO Aaron Wright finds that high fees will result in people turning to DAOs, which will help scale Ethereum along with L2s. “Once complete, DAOs and dapps likely will be paying gas, not end-users; just like end-users today don’t pay for [Amazon Web Services],” he said. “If current gas prices stick, gas prices could be a driver of DAO growth in 2021.”
High gas costs will push people towards DAOs. Over the next several months, we’ll see DAOs with both:
* gasless voting
* dramatically lower cost asset transfers
(@OpenLawOfficial will be releasing more info about the latter soon; code is in audit)
— Aaron Wright (@awrigh01) January 4, 2021
That said, Ethereum co-founder Vitalik Buterin has been a proponent of rollups as the network’s L2 scaling solution for quite a while now.
— David Mihal (@dmihal) January 5, 2021