The year 2020 so far has been all about altcoins and especially the DeFi ones. The boom caused by DeFi has led Ethereum transactions to skyrocket to the levels last seen in 2018 – when ICO activities dominated the network. The upcoming upgrade in the Ethereum network and the use of Dapps during this pandemic has further led people to transact in Ether (ETH) and tokens that are present on the Ethereum mainnet. This rise in activity can be seen from the following chart.
The growth in use of Dapps on the Ethereum network and the increase in transactions and popularity of ERC tokens like Tether (USDT), Aave (LEND), Compound (COMP) and many more have caused a rise in the daily transactions and also on the gas prices, which are at a record high. As seen in the chart below, transactional activity has risen from last year’s 1 million transactions per day to ~1.14 million per day.
This is great news for the Blockchain community but there are a few problems that need to be addressed. Gas fees recently reached an upside of $21.75 in some cases that has led to nullifying the earnings of small hodlers due to the increase in gas prices. This article aims to explain what gas is, what exchanges do to protect their users from high gas fees, gas limit and a lot more about the current state of the Ethereum network due to the rise in the gas limit.
What is Gas?
Gas is the amount of computational resources that is needed to execute smart contracts and transactions on the Ethereum network. Miners get paid an amount in Ether (ETH) depending on how much gas has been consumed. You can think of it as fuel needed for your car. The more fuel you have in your car, the further you can travel. Similarly, the more complex is a smart contract, the higher is the gas needed for its execution.
For any transaction to take place, users first submit a transaction in the network. Once it is validated by the nodes, the transaction is added to the set of pending transactions (also called the mempool).
Mining a block and storing transactions in them requires computational power and computer hardware. To make the network secured and immutable, it is essential to have a large number of nodes. They will only continue to validate transactions till they can generate profits.
Now, for every transaction to take place, users of the Ethereum network must pay some transaction fees. This depends on the gas limit and the gas price. The gas limit is the maximum units of gas the user is willing to spend on that transaction and the gas price is the price per unit of gas. Thus, transaction fee = gas limit * gas price. Gas is priced in Gwei where 1 Ether = 1,000,000,000 Gwei. It is usually the gas price that keeps fluctuating as it depends on traffic in the network. While gas is fixed for a particular transaction, variation in the gas price often leads to a fall or rise in the transaction/gas fee. This completely depends on the traffic in the network and the amount one is willing to pay for each unit of gas. Miners prefer to validate those transactions first that give them a higher gas price.
Why is Gas limit useful?
Gas limits are useful to prevent the users from spamming the network with low value or junk transactions. Since the gas limit sets the maximum units of gas one is willing to spend on a transaction, nodes know when to stop a transaction and when not. In case the gas limit is reached, miners stop executing the order. And if any gas is left over, it gets refunded to the user. The worst part about setting a low gas limit is that if an operation runs out of gas, then no changes are made to the transaction but the node must still be paid for the computing costs that were involved till all of the gas got exhausted.
The price of Ethereum has been range-bound between $225-$250 for more than a month now. Despite no changes in price, Ethereum as a network has been growing and performing better than its peers in this dull market. Various altcoins that have been developed on the Ethereum network have risen in fame, including the top 10 DeFi tokens which are all running on the Ethereum mainnet.
A recent vote by Ethereum miners to increase the block gas limit by 25% has increased the Ethereum block gas limit to a new all-time high of 12,500,000 from 10,000,000. There is a subtle difference between gas limit and block gas limit. While the gas limit is associated with the transaction fees one is willing to pay for their transaction, block gas limit controls the total amount of gas fees that can be spent within a single block’s worth of transactions. Theoretically, this increase in the gas limit has allowed the network to handle around 44 transactions per second (tps), instead of the previous limit of around 35. It usually happens when the network becomes congested. The last rise is the block gas limit occurred in September, 2019.
Ethereum is on pace to shatter its previous annual record for total gas spent (in native units)
The rise of DeFi and Tether’s continued invasion of Ethereum have, in part, increased network activity as well as the demand for block space pic.twitter.com/CnQiewrfsd
— Wilson Withiam (@WilsonWithiam) July 20, 2020
The recent rise in block gas limit has also allowed nodes to take up operations that involve more computing power and which involve complex smart contracts. As seen from the following graph, the rise in the gas limit has shown an increase in the gas spent per block. This indicates that several operations can now be executed because of the increase in the block gas limit.
While the block gas limit has increased and more gas is consumed per block, we do not see a very high increase in the number of transactions per block. This might be due to the increased use of complex smart contracts which, in turn, require more gas and hence higher transaction fees. So, this increased gas limit has had a higher impact on the execution of complex smart contracts as compared to the number of transactions.
The following graph also shows the daily median gas price that is spent on an Ethereum transaction. This gas price is five times higher than that of April which is the highest in one year (and more).
Another important observation we have made is that the transaction price has increased consistently over the last few weeks. This can be attributed to the rise in popularity of Dapps and tokens developed on Ethereum. The rise in the number of active addresses indicates how much the network is being used. This has also caused pending transactions per minute to rise to almost 163,000 transactions per minute.
Since there are so many transactions that are pending, miners can process those transactions that are offering a higher transaction fee. This has certainly caused a disadvantage to a large number of small hodlers who lose all their gains due to high gas fees paid by them. Several exchanges including CoinDCX have maintained a fixed price of transaction fees for all the withdrawals happening. This was done to protect our new traders who were unaware of the changes in the transaction fee and the execution of their transactions depending on the traffic in the network.
Since many of our traders were facing issues in getting their transactions processed, we have decided to soon make gas fees dynamic for fast transaction relays. A notification will soon be sent out to all our traders when this change has been made.
Talking about the disadvantages of this increase in gas limit, it takes more time for miners to process each block, resulting in the more uncle blocks being generated. Although this is not a problem that we are facing at the moment, it would be better if we do not increase the gas limit. Another reason is that increases in gas limit might also prompt weaker nodes to leave the network, potentially making the network less decentralized.
To conclude, beware of the rising transaction fees in the Ethereum network. It is highly recommended you check the standard gas price at ETH Gas Station before sending any transactions or using any Dapps. Your transaction might get stuck for a while if enough gas fee is not spent. As mentioned in one of the LinkedIn posts, you could use the following tip to reduce your fees.