Hey DEFI TIMES community,
We talked about Ethereum’s gas fees quite a few times in this newsletter. You all know that it is costly to transact on Ethereum.
It costs $10 to send a simple ETH transaction, $60 to send an ERC-20 token, and hundreds of dollars to interact with more complicated smart contracts. Today, Ethereum is not scalable for the masses, not even for the small DeFi community.
Imagine how high gas prices could become when more people join our industry during the next months. I can see a future where ETH transactions cost several hundreds of dollars.
This is certainly not sustainable. The majority of people in the crypto space are concerned about how those fees could affect the success of Ethereum in the long run. Many people claim that gas fees will kill the blockchain!
Today, I want to clear the FUD and explain the real risks and also the benefits they bring to the Ethereum community. I believe that high gas fees are a net positive thing for the Ethereum ecosystem and the whole DeFi revolution!
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The myth of the infrastructure phase
In a 2018 blog post of Union Square Ventures, Dani Grant and Nick Grossman explain the myth of the infrastructure phase. They claim that developers first build apps in every innovation cycle. The necessary infrastructure comes afterward.
Developers build great apps that reach the product-market fit. Several scaling problems occur, which need to be addressed by building additional infrastructure.
Another example: Planes (the app) were invented before there were airports (the infrastructure). You don’t need airports to have planes. But to have the broad consumer adoption of planes, you do need airports, so the breakout app that is an airplane came first in 1903, and inspired a phase where people built airlines in 1919, airports in 1928 and air traffic control in 1930 only after there were planes.
The same concept can be applied to developing blockchain apps and infrastructure. First, Uniswap and co reach product-market fit. Then scaling problems occur, which results in extremely high gas fees. Of course, high gas fees are unsustainable; additional infrastructure has to be built!
The main reason that apps have to come first is that it is hard to build infrastructure when you don’t know about the problems it will solve. We need to experience those problems to solve them. That’s why we are building second-layer solutions. The most popular DeFi apps (Synthetix, Uniswap, etc.) have confirmed they are closely working with Optimism to scale their apps. Optimism is the most promising second-layer solution that uses optimistic rollups.
The cycle goes: Uniswap → optimistic rollups → scaling Uniswap
It just doesn’t make sense to develop optimistic rollups before you even know that Uniswap will exist in the first place.
Will Gas Fees Kill Ethereum?
Many newcomers worry about gas prices. They believe that people will use other base chains - Polkadot, Cardano, and co. But is this really the case?
Well, high gas fees won’t kill Ethereum. The opposite is the case: They are a necessity for Ethereum to survive in the long run. The fact that you pay $10 per ETH transaction shows a strong demand for DeFi services.
High gas prices will not hinder innovation, but they are mandatory for innovation to thrive. The fact that we cannot scale for the masses right now will lead to developers making it possible. That is exactly why rollups and second-layer solutions are built. And that’s exactly why the ETH base chain is pivoting to Proof of Stake.
The fact that it is expensive to transact on Ethereum is net positive for the whole industry. It will lead to Ethereum scaling in the long run, and it will increase the usage of complementary (not competing!) blockchains.
Will competitors overtake Ethereum?
First of all, you should know that most games in business are not zero-sum games. In fact, wealth creation is a positive-sum game. What do I mean by this?
Well, imagine a buyer wants to purchase a toothbrush. In that case, he wants to exchange money for a toothbrush because his money is at least marginally less worth to him than the toothbrush he will receive. On the other side, the merchant values the money more than the toothbrush because he possesses them in abundance.
Both parties are better off after the transaction, which is called a positive-sum game. In a zero-sum game, one party’s gain to the other one’s loss.
Wealth creation is a positive-sum game by nature. The same concept applies to wealth creation in the blockchain industry.
Let’s say Polkadot grows its user-base by 1000 people. That doesn’t mean Etherum’s user-base has to shrink by 1000. The opposite is often the case: If you decide to use Polkadot, you also can use Ethereum simultaneously. The growth of one blockchain is not the other one’s loss.
How might be thinking: But gas fees are extremely high on Ethereum, so nobody will use it anymore!
Well, the fact that gas prices are high implies that people use Etherum. Otherwise, transactions would be cheap. The higher the gas prices, the more demand for DeFi services. From this point of view, you should worry about gas prices being low.
On the other hand, the expensive gas prices will lead to smaller transactions happening on other chains. However, that doesn’t mean Ethereum is going to die. Ethereum is, apart from Bitcoin, the most secure blockchain on the market. High net worth participants will prefer to use Ethereum over blockchains with a shorter time record.
To clear the FUD, Etherum will not go down if smaller transactions move from Ethereum to faster chains.
Are DApps on Ethereum going to die?
Now that we have cleared the FUD, you might still be asking yourself whether applications on Ethereum will suffer from gas fees.
The chain will certainly survive, but what will happen to all the applications building on top of it? We have seen the drama play out with Uniswap vs. Pancakeswap.
Binance chain captured massive value during the last week, and so did its biggest exchange: PancakeSwap. Look at the price increase of $CAKE.
It’s safe to say that no single chain has solved the scalability trilemma at this point. That’s why Binance Chain makes a significant trade-off: It sacrifices decentralization for scalability. In this way, it makes thousands of transactions per second possible. However, the price is high: Censorship risk.
And here’s the thing: Imagine you are a DeFi whale, with a net worth of over $100 million in ETH and DeFi tokens. You want to buy $1,000,000 worth of some token. Would you rather use Uniswap and pay a $100 transaction fee or swap it on Pancake swap for $1?
High-value transactions will always stay on Ethereum because the risk of censorship is too high on Binance Chain. Don’t get me wrong, you can definitely choose to use PancakeSwap for low-value transactions, but you have to know the trade-offs.
Whenever you hear someone claiming that Ethereum will die because of the high gas prices, please don’t fall for it! Always be careful with such a strong conclusion. Life is not black or white; it’s grey!
Ethereum is not going to die because of its high gas fees. The only way it could die in the future is that other chains provide decentralized, trustless, and scalable smart contracts way earlier than Ethereum can launch sharding. Binance Chain is definitely no competition.
The case of high gas fees killing Ethereum is not well-thought-out. Quite the opposite is true: Expensive gas prices signal that people want to use Ethereum so badly that they pay hundreds of dollars per transaction. The crazy demand will accelerate the development of second-layer solutions, such as rollups. They will increase the transaction throughput and lower gas costs again.
It’s important to think for yourself while acting in the crypto industry. Many newcomers are entering. Right now, there are three times more people in crypto than one month ago.
They will contribute to those false narratives. So, keep your head straight, look at the fundamentals, and HODL: We are in a bull market!
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.