Is Ethereum a Victim of Its Own Success?

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In Brief
  • Ethereum introduces two concepts when sending transactions: gas and gas price.

  • Many people are unable to execute their transactions due to a sharp increase in the price of ether and gas.

  • Projects that used Ethereum to certify information, perform process traceability, or create NFT sets, have been moving to other blockchain networks.

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Ethereum (ETH) is the most widely used blockchain network, at the moment. Some would think that this is good news, but unfortunately it’s not.



Many people are unable to execute their transactions due to a sharp increase in the price of ether and gas, a price that any user has to pay for their transaction to be validated, and are starting to look for alternatives on other networks.

So if Ethereum is seeing success and people are using it, why could this be detrimental to its adoption?



First things first, we have to go back, look at how Ethereum-based transactions work, and understand why we have to pay for every transaction we send to the network. 

Why are there gas fees to pay for transactions?

There are two fundamental reasons: to reward miners who validate transactions and to avoid “useless” transactions. If they were free, anyone could make millions of transactions a day crashing the network, as miners would find no economic benefit or incentive for validating them.

Ethereum introduces two concepts when sending transactions: gas and gas price. Transactions do not always have the same price.

We can explain this by making a comparison with a car. If a car went at the same speed every day to make the same journey, it would consume the same volume of gas. Now, the price of gas is not the same every day, so the cost of the same transaction at the same speed is different depending on the price we have paid for gas.

Ethereum has the same concept. Transactions always consume the same gas depending on the destination of the transaction. But in the network, the gas is not always at the same price, since the price depends on how collapsed the network is.

As blockchain is a technology where incentive mechanisms are fundamental to its proper functioning, the network uses the price of gas to protect it from collapsing.

When the network is heavily used, it is designed to increase the price of gas and thus, discourage transactions from taking place. Likewise, when its usage is very low, the price of gas is very cheap to incentivize its use.

Ethereum’s price rise negatively affects the network

We have a blockchain network that, thanks to the new DeFi ecosystem, is generating a high volume of transactions. This high volume of transactions makes the price of gas go up and, in addition, this gas has to be paid in a currency that has also experienced a large increase.

This is what is causing great damage to Ethereum adoption, and is forcing many projects to either look for a blockchain network with a lower cost per a transaction or wait for the price of gas to drop and stabilize.

In October 2020, certifying a document using Ethereum cost around $1, generating a new collection of non-fungible tokens (NFTs) cost from $10 to $15, and making a swap on Uniswap could cost around $3.

Now, the cost of certifying a file has risen to around $15, the cost of generating a new collection of NFTs is more than $120, and on Uniswap, we have seen costs around $200 per a swap.

Because of this, projects that used Ethereum to certify information, perform process traceability, or create NFT sets, have been moving to other blockchain networks — for example, Cardano, Stellar, or xDai, among others — or are looking for some solution in Ethereum Layer 2.

If the price of ether continues to rise to $2,000, to $3,000, as some experts predict, Ethereum could remain a large network specialized in DeFi, but the certification, traceability, or video game projects will be looking for other ecosystems which are economically viable.

The question remains: if Ethereum specializes in DeFi, will it be good for it and confirm its definitive takeoff as a great financial global network, or will it make it lose users interested in other use cases, and all of this will hurt the adoption and use of the network?

Disclaimer

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Jorge is a developer who specializes on Ethereum. He is a co-founder of SmartRights, a digital content certification startup, and is currently developing a DeFi protocol to empower the use of NFTs in various industries.

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