Ethereum commission rates dropped down to amounts comparable to 2020 figures.
FeeDecline and Blockchain Slump on Ethereum Network
The Ethereum network, the second-largest crypto network by market cap, has experienced a drastic drop in average transaction fees, from $2.57 to $0.77 — a whopping 70% decrease. This is the lowest since mid-2020.
This downtrend is backed by extremely lower median gas prices, currently hovering around 0.86 Gwei. According to Ethereum Gas Tracker, the average cost of a swap on a Decentralized Exchange (DEX) stands at $0.89, while a cross-chain transfer costs about $0.29.
Analysts at The Block have noted that while fee reductions typically encourage user activity, the magnitude of this drop, spanning over an extended period, suggests a lack of demand rather than network efficiency improvements. They attribute this to a recent slowdown in Ethereum blockchain activity.
The volume of online value transferred over the past seven days has seen a 60% decrease from early December peaks, settling at $3.56 billion.
Recently, Ethereum co-founder Vitalik Buterin proposed increasing the gas limit in a recent essay. Previously, discussions about accelerating upgrades on the network had taken place.
Although the significant reduction in transaction fees and the concurrent slowdown in blockchain activity might appear alarming, it can be attributed to several interconnected factors.
Key Factors Responsible for Lower Transaction Fees
- Layer 2 Solutions and Scaling Improvements
- Widely adopted Layer 2 (L2) solutions like Arbitrum, Optimism, and Base have dramatically lessened the need for users to engage directly with Ethereum’s main chain (Layer 1, or L1), leading to reduced transaction costs.
- By aggregating hundreds of transactions into single on-chain proofs, L2s have significantly diminished overall demand for L1 block space and resulted in lower average fees.
- Network Upgrades (e.g., Pectra Upgrade)
- Recent upgrades, including the Pectra upgrade, have improved Ethereum’s efficiency and scalability, further minimizing congestion and gas fees.
- The implementation of EIP-1559 introduced a base fee that adjusts dynamically with network demand, burning a part of the transaction fees, thereby stabilizing and, in some cases, lowering costs.
- Shifts in User Behavior and Demand
- The migration of users and decentralized applications (dApps) to L2 solutions has resulted in less direct activity on Ethereum’s mainnet.
- Although stablecoin volume has increased across the Ethereum ecosystem (including L2s), much of this activity is now being processed off-chain, thus reducing direct L1 transaction pressure.
Potential Causes of Blockchain Activity Slowdown
- Reduced Mainnet Usage
- With less activity taking place directly on the mainnet thanks to L2 adoption and shifting activity to sidechains, the mainnet experiences fewer transactions, creating an illusion of a slowdown in blockchain activity.
- The improved scalability and reduced fees may indicate that the network is managing its current load efficiently but not necessarily that demand has diminished overall.
- Market and Economic Factors
- Recent price declines and market corrections could have, even temporarily, decreased speculative trading and NFT activity, which are traditionally high gas consumers.
- Some of the robust stablecoin activity is driven by automated trading (bots), which may not generate as much on-chain complexity or gas demand as other types of transactions.
Embracing the Gas Limit Debate
- Gas Limit Increase Proposal
- Proposals to raise the gas limit are geared towards accommodating more transactions per block, potentially reducing congestion and fees further. However, with present low demand for mainnet block space due to L2 adoption, the urgency for such a raise is relatively low.
- Increasing the gas limit is seen as a step towards futureproofing, preparing for potential scaling needs and to accommodate increased demand if L2 solutions reach capacity or encounter issues.
What could be the reasons for the significant decrease in transaction fees on the Ethereum network while investing in finance or technology? The drops in fees could be attributed to the adoption of Layer 2 solutions and network upgrades such as the Pectra upgrade that minimize congestion and gas fees, or shifts in user behavior where users and decentralized applications migrate to L2 solutions, reducing the direct activity on Ethereum’s mainnet and lessening the demand for mainnet block space.
