Why are ETH Transaction prices so high?

Great Question, super simple answer: ETH transaction fees increase when the network is busier. This is caused by more transactions like sending tokens, trading on DEXes, or depositing their assets to lending platforms.

The Intro

Before we get too ahead of ourselves, some background on what Gas fees refers to.

Gas refers to the fee, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform.

To put it simply — Gas refers to the fees required to conduct a transaction on the Ethereum blockchain. To draw an analogy, if your car requires 5 Liters of fuel to move 100 Miles — The 100 miles running the car is your utility for which you are charged to pay for its fuel.

To give you further perspective, A block is added to the Bitcoin blockchain every 10 minutes and each one of them has a capacity limit. Let’s consider a scenario where people want to have their added transactions added to the blockchain, the miner would select the transaction which offers to pay the highest commission to maximize profit.

Hence it’s all boils to demand and supply — More the demand for people wanting to transact — More the gas fees.

You might argue why do we even have a limit or a capacity restrain on the size of the block, The answer is simple — Higher the block gas limit, higher the block size which leads to higher Hardware requirements leading to only lower people affording to run the nodes defeating the whole purpose of a decentralized currency.

The gas prices for a transaction are currently around 150 -200 GWEI ( 1 GWEI = 1 Billionth of an Ethereum)

Some quick math’s to understand the price of transaction :

Gas fees on 1 transaction = 100 GWEI

21,000 gas limit = 21,000*200 ~ 4,00,000 or 0.004 Ethereum = 0.004*2000 (Current Ethereum Price ~ $2000) = $8

So one thing is straight, it’s an extraordinary and impractical price to pay for the small transaction pay.

Currently, Users switching between different ERC-20 tokens to exchange tokens on Uniswap or Farm Yields on different protocols, and soaring ETH transactions are partly to blame for this unprecedented position.

Looking at the current size of the Defi sector, it seems that the growing acceptance could drive the Ethereum fees even higher until a blockchain upgrade — like ETH 2.0 — is introduced.

“ The high gas fees are a sign of how many people are in crypto for money. Money is being created out of thin air, and miners for their part in facilitating the transfer of wealth, are cashing in through exorbitant gas fees ”

A temporary solution? ETH Gas cashback tokens

Imagine a scenario when you spent $20 worth in Uniswap transactions and get an ERC- 20 token worth the same reimbursed.

The “gas” tokens are built on Ethereum you hold in your wallet and that gives you up to 100% cashback on your transaction fees. Gas tokens use simple tokenomics to create a non-inflationary token where you’re are able to earn that token back. Doesn’t this sound too good to be true?

Currently, there are 3 projects which have caught some attention.

  1. UniDexGas (UNDG)
  2. Ethanol (ENOL) is a blockchain
  3. GASG

Is it sustainable or just a Ponzi scheme?

The 2% a day is not a guaranteed return in Ethereum or Bitcoin.

For example, if you have UNDG coins, you get 2% of those as cashback.

If you have 5 tokens for UNDG — you are eligible 5 * 2% = 0.1 UNDG or (40 USDT) Now as UNDG prices move up- the cashback moves up too, if it goes to zero — so does your cashback.

You are going to get the rewards in the native token which raises questions about the supply and sustainability?

Where is the cashback coming from? The way gas token increases in values as they get more users. The reward pool gets filled in various ways :

  • When you buy or transfer these tokens: ~4% are sent to the reward pool, it’s a one-time event for holders. (If you buy these $100 worth of these tokens, you will only get $96 in your wallet)
  • There are different fees associated with these tokens which keep the reward pool pumping — Whenever people transact (buy/sell/claim cashback) — there are small fees involved that join the reward pool.

The sustainability of the tokens is dependent on the reward pool — whether they stay full or get drained as the user base grows. The devs assume you that there would be enough buyer or sellers even if the all the current token holders just hold the token to get the gas back.

So, What happens when the reward pool just goes to 0?

Nothing, you just won’t be able to get the cashback or cover your gas cost.

We might have to just wait and see how does the tokenomics work and how devs adjust the fees and the reward pool to sustain the tokens in the long term. My only current concern is that these projects do not charge enough fees to further supplement the reward pool — Even a 50% fee cashback won’t hurt in the long run.

Aspiring Data Scientist | Consulting @ ZS Associates | Bits Pilani'20