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Three Reasons Why Gas Prices Are Low
Gas prices have been consistently low during the last weeks - here’s why!
Hey DEFI TIMES community,
Gas prices have been consistently low during the last few weeks.
At first sight, this seems like a bad thing because it could mean that fewer people use Ethereum. On-chain activity could be declining; however, if you look closer, you see that people still use DeFi services.
Low gas prices can have several different reasons that are actually quite positive for the Ethereum ecosystem.
Today, I would like to give you the three most plausible reasons why gas prices have been declining and why it could actually be a permanent state.
Gas prices of 40 gwei are super cheap when compared to DeFi summer 2020. At this point, most people thought that gas prices would never come down again; however, they were wrong.
They did come down again, and this is indeed a positive thing!
… and here is why!
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1. Polygon is capturing a lot of activity from Ethereum
As gas fees have been going through the roof in DeFi summer 2020, developers started to build alternative solutions to scale Ethereum off-chain. One of the most prominent scaling solutions is Polygon - a sidechain hosting its own DApp ecosystem.
A sidechain is basically another blockchain existing simultaneously to Ethereum; however, a sidechain is closely connected and interoperable with Ethereum. Polygon is probably the most successful sidechain today.
Another one is xDai - but Polygon gained much more popularity over the last months and weeks. It literally exploded in volume and usage.
Just as Ethereum’s DApp ecosystem is growing exponentially, Polygon is developing its own network effect. Take a look at Polygons flourishing ecosystem:
As more and more users switch over to Polygon, activity on Ethereum declines. What happens when Ethereum is used less? Of course, gas fees go down!
That’s exactly what we saw over the last couple of months. Polygon started to grow exponentially and people decided to move over to Polygon for cheaper gas reasons.
Polygon is not the only scaling solution that helps to free Ethereum block space. Second layer solutions like Optimistic- and zk-Rollups are also growing like never before!
In my opinion, this is a lasting trend! Polygon will continue to grow and become bigger and bigger - ultimately leading to Ethereum gas fees declining even further! It’s a positive trend for both Ethereum and Polygon because both blockchains do not compete with each other. Polygon is part of the Ethereum ecosystem!
We are all growing together!
2. Block Gas limit (block size) was increased by 20%
On April 21st, the Ethereum block gas limit was raised by 20%. This essentially means that more block space is available for transactions to be included. When more transactions are included per block, the possible transactions per second increase.
Even though increasing the gas limit enhances the scalability of the network, it also comes with inherent risks and trade-offs. For example, a higher gas limit makes Ethereum more centralized as nodes have to carry more data in a shorter period of time. That means fewer nodes are able to join Ethereum!
That’s why we have to be careful with increasing the block gas limit too much. In fact, BSC suffers a lot from centralization due to high gas limits.
Even though the recent gas limit increase had immediate positive effects on gas prices and scalability, you need to understand that it’s not a sustainable solution to scale Ethereum for the masses.
3. Flashbots is allowing MEV extractors to bypass the mempool
Frontrunning has always been an issue for Ethereum. If you make a transaction to exploit an arbitrage opportunity, front-running bots will make the same transaction with a slightly higher gas price. That’s how gas fees are pushed higher and higher on-chain.
This has been the case since Ethereum was first introduced. The problem peaked in DeFi summer 2020, when gas prices reached unprecedented levels.
However, very recently, “Flashbots” has found an amazing way to solve this problem of front-running. Flashbots created an Ethereum node for miners that watches the transaction pool like a normal node, but with one key difference: It also connects to an external server run by Flashbots.
This server is a parallel channel that directly connects miners to bots that want their transactions included. That’s how miners can communicate directly with these bots and the need for bidding up the gas price on-chain vanishes.
Flashbots has seen incredible growth during the last couple of months and almost completely eliminated the problem of frontrunning on-chain. Of course, Flashbots cannot eliminate frontrunning in general. But they have managed to drastically reduce the average gas costs!
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.