Discover more from DEFI TIMES Newsletter
Sunday Thoughts – How are Gas Prices Going to Affect Usage of Ethereum?
The last few days have been turbulent. Uniswap launched its token and did a free airdrop to everyone who has used the decentralized exchange in the past. Thousands of people received $1200, almost the same size as the stimulus check that US citizens received during the Corona crisis. It was free money. Many people got excited and wanted to claim their tokens as soon as possible. Unfortunately, the Ethereum blockchain has one big problem: block space is rare and costly. Gas prices exploded. They hit a record level of almost 1.000 gwei! How will this continue? How will these levels of gas prices affect the usage of Ethereum? Let’s talk about it!
Ethereum is the most used blockchain right now. Its network effect is powerful and that’s why so many applications want to be on Ethereum. But there’s one significant trade-off: It’s expensive to use Ethereum. Just look at the current recommended gas fees on ETH Gas Station:
Retailers haven’t even joined yet. We are still early in this bull market. I truly believe that we could see gas prices constantly rising to 1000+ gwei in the future. What will happen when we see more and more people joining this industry?
I guess that they will search for other alternatives than Ethereum. Blockchains, that are faster and less expensive, even at the expense of less decentralization. Projects like Polkadot, DeFi Chain, Cosmos, Binance Chain, or even EOS are increasingly attracting users again.
This can be seen with the recent example of Binance Smart Chain (BSC), which is a blockchain that is compatible with the Ethereum virtual machine. That’s why some Ethereum projects already decided to collaborate with BSC (ForTube, Cream, …). This is mainly due to high gas fees, as projects are worrying that their users will not be able to afford using their protocols anymore. And this is only the beginning! Ethereum will be a place for the privileged.
Imagine Ethereum like New York City. Many people want to live there but few can afford it. So people move somewhere else. This will happen to Ethereum too.
Who will win?
People will need to decide between the strong network effect of Ethereum and cheap transactions. What if there is a solution that combines these advantages?
Consider Polkadot, which is a project that focuses on the interoperability of blockchains. Soon you will be able to take your tokens from Ethereum to other blockchains, such as Polkadot’s Parachains. On the Parachains you can send your ETH and ERC20 tokens cheaply, while still using Ethereum products. This is why Polkadot, Cosmos, and other interoperability solutions are so powerful. They do not compete with Ethereum but rather complete it.
This is how we will scale. By working together and combining our strengths, eliminating our weaknesses.
Great opportunity for new projects
Another great example is DeFi Chain. Launched by Dr. Julian Hosp, this project could potentially profit from high Ethereum gas fees. By synchronizing the hashes of DeFi Chain with the Bitcoin blockchain, DeFi Chain is highly secure and extremely fast. I see no reason, people will not be willing to give it a try when the blockchain gains some traction.
The demand for DeFi is so big at the moment, that this will not stop here. We will see many new blockchains and projects that try to solve the gas problem. Whether it will be L2 solutions, totally different blockchains, or interoperability solutions. I guess that every project that is truly adding value to the space will be rewarded greatly.
DeFi is still young and there could be a big bubble coming up. There will be huge amounts of money flowing into this space funding high-quality projects that will build the future of decentralized finance. A future with low transaction fees, high security, and instant transactions.
Don’t get me wrong. I’m still extremely bullish in ETH. I just think that other projects will be able to catch up because they are solving the one fundamental problem that Ethereum currently has. I would rather send my tokens on DeFi Chain than send them on Ethereum for $20.
The big question is: How high can gas prices rise until Ethereum is unusable? The answer is rather simple. There is no limit. The market decides about these prices and as long as someone is willing to pay for it, Ethereum will be used. But I’m making the point that this is a great chance for other projects to catch up.
Nobody will be the one and only winner though. It will all be interoperable. Everyone will win except those that are trying to compete.
So don’t try to push other projects down. Try to complete them and your project will succeed.
All information presented above is for educational purposes only and should not be taken as investment advice.