Will High Gas Fees Pose a Roadblock to Blockchain Adoption?

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Sameep Singhania Hacker Noon profile picture

@sameepsinghaniaSameep Singhania

Co-Founder at QuickSwap, a UniSwap DEX clone utilizing the most adopted Ethereum Layer 2 scaling solution: Polygon.

It’s simple logic — if a driver can’t afford to put fuel in their tank, they won’t get where they need to go. A similar principle applies to making transactions on the blockchain; if users can’t justify the gas fees associated with processing and validating transactions, they won’t be able to make them. 

This isn’t to say that gas fees are somehow unnecessary or unimportant. After all, the charges compensate miners for their computing power, and their efforts are valuable. If they judge that the gas limit (e.g.., the top price a person is willing to pay for their transaction) is too low to be worth the effort, they can opt to ignore a transaction. 

But under this arrangement, gas fee fluctuation is inevitable. Prices spike when transaction demand is high because miners have more transactions vying for their attention — and as interest in decentralized finance (DeFi) continues to trend upward, blockchain enthusiasts face a real risk of being “grounded” by high gas fees. To borrow a summation from one CNBC writer: “The blockchain has a long-standing problem with scaling, and its highly unpredictable and sometimes exorbitant transaction fees can annoy even its biggest fans.”

What happens when it spikes

DeFi proponents saw as much in mid-May, when the average transaction fee on Ethereum spiked to a high of $44.92. This price squeeze was partly due to DeFi’s continued success and popularity as well as rising consumer interest in nonfungible tokens (NFTs) — both of which primarily use the Ehereum blockchain. 

That said, these sky-high gas fees didn’t persist for long; within a month, average transaction costs plummeted nearly 90% to $3.86. Critics might argue that the June spike was a fluke, not something that consumers need to be overly concerned about. And that may be true — DeFi users may not need to resign themselves to paying high fees on every transaction. However, it’s not just the high fees that are concerning; it’s the inconsistency. 

As of late August 23rd, the average transaction fee on Ethereum had climbed back to $13.2. This might be a far cry from the $45 peak seen in May, but it’s also a substantial boost above the $4 low reported in June. Right now, consumers don’t know how much they’ll need to pay to process a transaction on any given day. To return to the road trip metaphor, users don’t have any certainty that they’ll be able to fill up their tanks and go whenever they want. 

The occasional pause might be acceptable — if irritating — to DeFi enthusiasts, because they believe in the technology’s value and potential. However, it could pose a very real roadblock to mainstream adoption. Ordinary consumers may want the innovative capabilities that DeFi offers, but few are willing to compromise on predictability. Conventional finance offers reassuring consistency that, at the moment, DeFi doesn’t match. 

“People are building really interesting – but mostly experimental – tools,” Emin Gün Sirer, Ava Labs founder and an associate professor of computer science at Cornell University, commented for Wired in January. “So some of these ‘LEGO building blocks’ are quite interesting and do things that Wall Street cannot do. But some of them end up interacting in unforeseen ways.”

However, lower and more consistent gas fees may soon become the norm. In early August, the Ethereum blockchain underwent a “hard fork” — that is, a major base code change that “forks” the software away from its founders’ original vision. The London hard fork (or EIP-1559, in technical verbiage) establishes control measures that will, hopefully, stabilize gas fees. It will also double block size so that twice the number of transactions can occur in each block. 

Ethereum’s Fork

“If you think of Ethereum like a highway, London is adding a few lanes to tamp down traffic and is standardizing toll prices,” DeFi journalist MacKenzie Sigalos explained for Crypto Decoded after the fork went into effect. 

In the past, Ethereum’s protocol set gas prices by holding a blind auction in every block. The new measure does away with that approach and algorithmically determines a base price — though users can still “tip” miners to jump the metaphorical line. The fork isn’t a true fix to high gas prices; rather, it’s a stabilizing factor intended to prevent major price swings. As a result, DeFi users may still be subject to high prices and gas “groundings” when they process transactions on the Ethereum blockchain. 

The answer, then, may be to not process transactions directly on Ethereum. In recent years, the DeFi sector has begun to gravitate towards side-chain rollups — that is, layer-2 solutions that securely bundle transactions on secondary chains before deploying them onto the main Ethereum chain. This step-around allows users to bolster efficiency and lower their risk of experiencing high gas fees. 

Consider Polygon as an example; originally known as Matic Network, Polygon is a layer-2 solution that maintains an independent proof-of-stake blockchain and substantially increases both network scalability and transaction speeds. This push towards scalability could go a long way towards resolving DeFi’s current pricing fluctuations and facilitating a more consistent user experience. 

dApps have already begun to realize some of these benefits. For instance, QuickSwap — a decentralized exchange that facilitates trustless cryptocurrency trades — leverages Polygon’s layer-2 functionalities to significantly reduce gas fee prices and increase its dApp speed. QuickSwap also offers a feature that flags disparities between estimated and market trade prices; users can also set a price impact limit to cancel trades when gas fees spike above a certain threshold. 

But even with Ethereum’s recent hard fork and the rise of layer-2 solutions, providing a refined, consistent, and reliable financial experience may take some time. DeFi is in its early stages; it’s only reasonable to assume that it will continue to experience growing pains as it develops into a fully-fledged, mainstream-adopted financial sector. 

In a way, the existence of a red-flag pricing feature is indicative of DeFi’s in-progress status. DApps like QuickSwap take advantage of layer-2 functionalities. However, they also recognize that blockchain technology hasn’t quite solved the problem posed by fluctuating gas fees — and so, they provide alerts to protect consumers from pricing spikes. While users may still find themselves “grounded” from making transactions from time to time, such features ameliorate some frustrations and offer a clear signal that the technology is evolving for the better. 

Mainstream financial consumers want the best of both worlds: to experience both DeFi’s innovative capabilities and the consistency inherent to conventional solutions. DeFi isn’t quite there yet; however, events like Ethereum’s recent fork and the meteoric rise of layer-2 solutions indicate that mainstream adoption could soon occur. 

Eventually, blockchain enthusiasts will be able to fill up their metaphorical tanks and go — without needing to keep a wary eye on fluctuating gas prices.  

by Sameep Singhania @sameepsinghania. Co-Founder at QuickSwap, a UniSwap DEX clone utilizing the most adopted Ethereum Layer 2 scaling solution: Polygon. Read my stories

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