Ethereum has ambitions to become a hub for decentralized finance (DeFi) – one where millions of users conduct sophisticated transactions using financial applications and payment systems on its network. The platform’s selling point is its decentralized and peer-to-peer design that reduces costs and transaction times.
But transactions on Ethereum are time-consuming. A technical and complicated interface also ensures that users have little control over the process and are, often, at the mercy of erratic and unpredictable swings in gas fees.
Who Decides Ethereum’s Transaction Fees?
Key to realizing Ethereum’s goal of a decentralized network of financial applications are its gas fees or the charges for using its network. The fees are meant to be similar to the ones charged by current providers of financial services and payment networks. Because this is the world of cryptocurrencies, users can set the fee amount they are willing to pay.
How much control do users really have over the process?
Based on my research, very little.
While users can specify priority fees and tips, they cannot control network congestion or block gas limits (more on those later). Together, both can inflate network fees and delay (and, in some cases, prevent) confirmation times, resulting in users losing their fee amounts altogether.
To understand why the user is not in-charge of the process currently, it is important to know how fees are set. When Ethereum was launched, user transaction bids determined fees. After the London upgrade, however, the fee was split into three components – a base fee, priority fee, and miner tips. The first one depends on network characteristics, such as congestion, at the time of the transaction and the latter two are controlled by the users. To an outsider, the fee design might seem innovative and oriented towards users.
In fact, it is just the opposite.
Even though it is burnt, the base fee is the most important ingredient in gas fee calculations. It is a function of code which, in turn, determines the transaction’s computation requirements, bandwidth, and storage size on the Ethereum blockchain.
A simple transaction, such as a funds transfer between two parties on the blockchain, might require the minimum gas fee of 21,000 gwei (the unit in which gas is measured). Complex transactions involving many computations and several parties need substantially more gas. Examples of such transactions include borrowing and lending transactions that have proliferated on DeFi.
In the past, network congestion has been blamed for spikes in Ethereum’s base fee. For example, the growing popularity of non-fungible tokens (NFTs) was blamed for the September 2021 spike in gas fees. More recently, BAYC’s sale of Otherdeed real estate deeds on the Ethereum blockchain caused gas fees to skyrocket by more than 800% during a real estate transaction.
In both instances, users were blindsided by the network’s state at that time. Their priority fee bid and accompanying tips were not sufficient to be included in a block. Transactions remained unfulfilled and users had to forfeit fee amounts. [In the latter case, BAYC claims to have refunded user fees].
While network congestion is one part of the equation, block limits on gas are the other part. In Bitcoin, block sizes are limited by byte size. Thus, a block stops including transactions it reaches size limits. In Ethereum, they are limited by the sum of transaction gas in each block. The problem is that block gas limits are variable and keep changing based on network demand.
A high gas fee bid can increase your chances of being included in a block. But there is no guarantee of confirmation since the network may be congested due to thousands of transactions from a popular application like OpenSea. A low gas fee bid, on the other hand, could mean your transaction remains stuck in a pending state for a long period of time or is not executed at all. Thus, you might end up losing gas fees.
The kicker here is that Ethereum’s gas fees are volatile. Much like the prices of their crypto brethren, Ethereum’s gas fees are not dictated by rational reason. Stablecoin redemptions are said to be drivers for price increases at times. At other times, excitement over technical upgrades might inflate prices.
Gas prices spike and crash many times throughout the day. A possible solution to this problem is to time the transaction to off peak periods. But that runs the risk of your transaction taking a long time to be confirmed by the network.
An Ethereum Fee Experiment
To find out the actual cost of conducting a transaction on Ethereum’s network, I moved from Eth from my Coinbase account to Metamask. According to Ethereum’s network, the transaction as confirmed in 30 seconds. But, for more than two days, the same network displayed a “pending” state for the transaction. [For those wondering how and why this happened, delayed database states may be the answer].
I have been attempting to conduct a swap of my ether since but my attempts, so far, have been unsuccessful. Therefore, I turned to YouTube to find out charges for further transactions. Not surprisingly, lending and borrowing transactions are expensive in terms of gas fees.
How expensive you ask?
Metamask offers three options – low, market, and aggressive. The low option is, possibly, the cheapest option but it is also the slowest. The market and aggressive options may be expensive for users based on this YouTube video. [Imagine paying more than 10% of the amount transferred as gas fees for a simple swap transaction]. As DeFi becomes more ambitious in the scope and complexity of its transactions, those charges will increase and the user will fork out more as gas fees. As has happened in the past, costly transactions are no guarantee for quick confirmation or processing.
Scaling and a change in consensus algorithms are being offered as potential solutions to the problem of high fees. But initial indications are that the Merge – Ethereum’s move from the energy-intensive Proof of Work (PoW) to Proof of Stake (PoS) – will not make fees cheaper in the short term. These problems do not make for a user-friendly experience in an ecosystem premised on democratizing access to financial services.
“Basically, it is frustrating,” says Olga Ortega, co-founder of AnalytEx, a blockchain analytics platform. According to her, Ethereum’s opaque system of setting fees will affect its overall adoption. “I can set the gas price [based on my budget] but even then my transaction will be rejected,” she explains. “It is not user-friendly.”