An In-depth Look At The Soaring ETH Gas Fees and Mining Revenues
The Ethereum (ETH) price rallied to a new all-time high of $2,544.30 following the implementation of the Berlin hard fork that went live on April 15 at block 12,244,000. ETH, the native cryptocurrency of the Ethereum network, has now logged gains of over 220% since the start of 2021.
Over the past few months, the ETH price pump has resulted in increased demand for the network, resulting in ridiculous gas fees and sluggish transaction times.
The blockchain is now pretty much unusable for average size transactions, which can range between $60 and $100 for each transaction. One Reddit user recently lamented paying $96 for a simple Uniswap trade, which he deemed unacceptable as the new normal.
In late February 2021, the average transaction fee on Ethereum hit a lifetime high of $38.213, substantially surpassing last year’s all-time high of $8.25 set in September amid the DeFi boom. As per the latest data from Etherscan.io, the average gas fees on Ethereum stand at approximately $23.
Ethereum’s core dev team used the Berlin upgrade to incorporate four ETH Improvement Proposals (EIP), which will optimize the use of gas fees and bolster the network’s security. The just-concluded improvement and other proposals to be implemented in the coming months will go a long way in curbing the gas fee menace on ETH.
Finding a lasting solution to the fees problem could help Ethereum hold on to its first-mover advantage and overall dominance as the blockchain of choice for building smart contracts.
Increasing Demand for the Ethereum Blockchain
Per the latest data from BitinfoCharts, the spikes in transaction fees have been accompanied by surges in the number of active addresses. For instance, during the previous ATH in fees set last September, the number of active addresses on the network rose to just under 750K.
Statistics show that during the recent February 2 all-time high in gas fees, the number of users on Ethereum stood at about 760,000.
The mounting fees are primarily driven by exponential growth in the DeFi sector, which has seen multiple protocols emerge offering innovative decentralized finance services. Non-fungible tokens (NFTs) are also shaping up to be the next frontier of the crypto sphere, further fuelling the ever-growing demand for ERC20 and ERC710 assets on the network.
As a result in the mounting demand, some folks are often battered with jaw-dropping jaw-dropping fees while using various protocols that require the execution of complex smart contracts.
Tackling Mounting Gas Fees on Ethereum
The core dev team at the second-largest blockchain network, led by Vitalik Buterin, has expressed concerns about the ever-higher premiums users have to pay to get their transactions through. They propose a multi-faceted approach to the issue that will incorporate various EIPs to lower gas fees.
The recent Berlin Hard Fork introduced several upgrades to the ETH software geared toward solving high transaction fees. The primary change was EIP-2565, which decreases some gas costs algorithmically. Also included in the hard fork is EIP-2718, an upgrade designed to reduce traffic and congestion by allowing multiple transaction types on the network.
The Berlin fork will lead up to the rollout of the London Fork this coming July, which will usher in ETH 2.0. The proof-of-stake network should permanently solve the high gas fee menace by creating shard chains. The chains ease congestion and ensure that transaction fees reduce as infrastructural supply increases.
How the EIP 1559 Model Will Affect Miners
Also to be packaged in the aforementioned London upgrade is EIP 1559, which is expected to cut down transaction fees significantly. The new model was recently green-lit for deployment by the ETH dev team, and is expected to overhaul the current auction method that determines transaction fees.
The controversial proposal will reduce the overall supply via a “burn” mechanism dubbed BASEFEE. This BASEFEE will serve as a standard rate across the network that goes up when the market is busy and drops when activity reduces.
EIP 1559 has gained the support of most users and App developers due to its potential to introduce fair fees for everyone. However, most ETH miners are opposed to the change, as they argue it will eat into their profits.
Indeed, mining ETH has become a lucrative venture. In Jan 2021, elevated fees and network activity resulted in the ETH miners raking in a record $830M. The amount represented a 120% jump in miner revenue from Dec 2020. The following month, miner earnings shot up to over $1.3 billion.
The latest data from the CoinMetrics pegs miner revenue at $959M, with $429.3 million coming from transaction fees alone. As per the data, miners have received an average of $531M in transaction fees over the past four months.
Therefore, they will have brought in an estimated $1.06 billion in gas fees from now till the London Hard Fork is executed in July.
Will the EIP 1559 Model Benefit the ETH Ecosystem?
Under the proposed EIP 1559 model, gas fees don’t go to miners; they are removed from circulation via the burn mechanism. This pricing model overhaul takes away the control of network fees from miners and ushers in an era of fair fees on Ethereum. Miners will still get compensation for their work in the form of freshly minted Ether.
Disgruntled miners argue that introducing a base fee does not necessarily mean that the fees will be lower. Nevertheless, the upgrade is expected to bring substantial economic and user experience benefits to the ETH ecosystem.
Moreover, the upcoming EIP will enable all users to correctly predict the gas fees, which isn’t possible in the current auction-style system.
The good news is that the deflationary burn mechanism will likely tighten Ether’s supply and cause prices to spike high enough to appease any miners who oppose the change.