Notes 5/6: As Bitcoin and Ethereum Transaction Fees Spike, Validator and Miner Profits Multiply

In the chill of depressed prices and volatility for cryptocurrency tokens, transaction fees for at the world’s two biggest blockchains, Bitcoin and Ethereum, are red hot. Average fees on bitcoin’s blockchain climbed to $7.25 last week per transaction on the back of frenzied demand for Ordinals – bitcoin’s version of non-fungible tokens (NFTs).

A similar story played out at Ethereum, where the latest meme coin, another worthless token in an endless parade, hogged blockspace and drove up fees for other transactions. The blockchain’s average transaction price jumped by more than 50%, since the token’s launch on April 18, to $15.82. Apparently, traders for PEPE, the meme coin, accounted for more than 410,000 transactions worth $10 million on decentralized exchange Uniswap.   

Mining Profits Multiply

High transaction fees are not an anomaly for crypto. They have occurred consistently earlier and will, likely, continue to do so in the future. Blockchain critics blame their prevalence on scaling problems.

But congestion on blockchains is a feature and not a bug. It is designed to act as an incentive for miners to keep on minting tokens that do not have real world use cases or demand sources. The piling up of transactions in a cryptocurrency’s network multiplies confirmation times. For example, the average time for confirm a transaction on bitcoin’s network skyrocketed to 935.81 minutes on April 19, about ten days after the launch of Ordinals on bitcoin.

Users pay a premium to miners and validators to bypass the blockchain’s logjam and get their transactions included in a block. Bitcoin fees skyrocketed to 124 BTC on May 3rd, a rise of 484 percent from the last four days, according to Glassnode.

A Tried and Tested Script

The story of clogged networks and high fees is an old one and has been played out many times earlier. In 2020, it took a week for total fees paid to miners to fall from 201 BTC to 80 BTC as the network’s congestion eased and its difficulty level declined. The percentage of miner revenues from fees slid to 9.4% from 21% earlier. This time around, Bitcoin’s difficulty level remains at record highs but its hash rate, or the total amount of firepower deployed to mint new coins, is low.  

On Ethereum, the surge in fees has been accompanied with a massive burn or removal of ether tokens from existence. According to a tweet, a record 10,282.98 ether was burned in 24 hours on Friday. The cryptocurrency is already on the road to deflating its supply and yesterday’s burn accelerated the process. Not surprisingly, its price shot up by 7% in the same period to $1,992.74, carving out another avenue for profits for validators on its network.

Minting Money Crypto Style

While reports state that both blockchains had high transaction numbers, there is not much proof of the phenomenon in available statistics from Ethereum. Regardless, this week’s profit taking in cryptocurrency occurred at an opportune moment. Illiquidity, scandals, and regulatory action are fast decimating the trading environment for cryptocurrencies.

Meanwhile, the supply for bitcoin remains low as the difficulty level for the algorithm used to mine it remains high. High transaction fees and clogged networks are a boon for miner profitability during these times.

A Rewards Bonanza at Ethereum

At Ethereum, the slashing of supply also multiplied staking rewards at validators. Between Tuesday and Friday, ether supply crashed by roughly 303,541 tokens. In the same period, daily staking rewards distributed between validators catapulted on its blockchain.

Between Tuesday and Wednesday, a period when almost 150,000 ether was burnt, staking rewards shot up by almost 310 percent to 141,510.7. They were at 77,355.1 ether by Friday, when ether supply had further plunged by a further 154,130

A Case for the SEC

Ethereum is currently advertising mind-boggling staking rewards of 8.6% on its site. That figure is more than double the rate it offered in the run up to the Shapella upgrade that enabled withdrawals of staked ether. At Lido, which is the biggest platform for staking ether, the rewards rate is 5.9%. The leap in rewards has multiplied yields for the platform’s stakers, right before it is scheduled to commence withdrawals in the next week or so.

As usual, the reasons for a yields bonanza remain unclear. Nothing much has changed materially on the Ethereum blockchain or in the workings of ether since the upgrade, except for a decline in its supply.

MEVs To The Rescue

A quick glance through a chart that shows the distribution of rewards between the consensus and execution layers for Lido is telling. It shows that rewards for the former have remained constant and those for the latter have surged.

Consensus layer rewards on Ethereum are distributed to propose and attest new blocks of transactions while execution layer rewards are distributed for tips and priority fees. Maximal Extractable Value (MEV), a questionable tactic that involves front running and sandwich attacking user transactions to inflate fees, is also part of this layer.

Since transaction numbers have not risen much on Ethereum, one can only assume the combination of a deflation in supply, a congestion in its network, and MEVs has helped pump up rewards for investors on the blockchain.


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