Blockchain affords immense benefits to many use cases in the financial industry and others. But use of a powerful decentralized computing network like Ethereum comes at a cost.
The Ethereum blockchain is secured by a decentralized group of miners, who are paid for their work. This payment ensures that the miners behave properly and prevents spammers from clogging the network.
But what happens when the demand for computing power on the blockchain outpaces the limits of the network? Fees skyrocket and small transactions become entirely uneconomical.
This is happening right now, and Ethereum is under intense pressure to expand their network capabilities. Currently, Ethereum can handle around 15 transactions per second. For reference, Bitcoin can handle around 5 and major credit cards can handle around 3,000.
To save on Ethereum Gas Fees visit www.gasnow.org/ where you can track the current network congestion and gas prices.
What Determines Ethereum Gas Prices
The cost for power, or space on the Ethereum blockchain, is set by the market. Gas fees fluctuate constantly depending on the number of miners working, and the number of decentralized applications (DApps) being used at any given time.
Different types of blockchain interactions require different amounts of computational power, called gas. Each unit of gas has a price, and the gas price is known as GWEI.
When interacting with the blockchain, the amount of gas is based on the action, but you decide your gas price. By selecting a GWEI over the market price, you can be sure that your transaction will get processed quickly. If you can wait, you can set a lower GWEI and hope it gets filled when the market is quiet.
Wallets such as MetaMask simplify this process for users, allowing them to choose slow, medium or fast.
Why are Ethereum Gas Fees So High?
DApps powered by Ethereum can do anything from mint NFTs to provide automated liquidity pools. Because Ethereum has the largest decentralized network capable of handling smart contracts, it’s theoretically the most secure option for DApps to run on.
This demand for Ethereum is clearly shown by the sky-high gas fees. Minting an NFT can cost upwards of $100, making them inaccessible for a lot of low-budget artists right now.
The same goes for gaming and other low-volume financial applications that could see huge benefits from the blockchain as soon as it becomes more affordable.
Ethereum gas prices might drop much sooner than you think.
How Ethereum 2.0 Will Drastically Lower Gas Prices
Ethereum has ambitious plans to scale the network to handle 150,000 transactions per seconds by the end of 2021. A major network overhaul, dubbed Ethereum 2.0, promises to deliver on this scale at the same time as making the network more secure and eco-friendly.
Ethereum 2.0 will upgrade the network from Proof of Work (PoW) to Proof of Stake (PoS). Proof of Stake networks are maintained by validators, who stake currency in exchange for the right to verify transactions. They earn the reward associated with each transaction they verify, which is estimated to payout around 7.5% of your staked tokens yearly.
Proof of Stake eliminates the energy-intensive problem solving from the PoW model, but the bump in transaction volume comes from sharding.
Sharding splits up each block of transactions into smaller chunks called shards. These shards are distributed randomly and secretly to validators. Before sharding, each miner was responsible for authenticating every transaction in the block. This much duplicate work made the system secure, but the randomization aspect of sharding actually makes it more secure than the previous system.
When Ethereum 2.0 is complete, the network should be able to handle between 100,000-150,000 transactions per second, but the upgrade has been on the way for years with multiple delays already.
With so much demand for Ethereum, there needs to be a quicker solution: Enter Layer 2.
Ethereum Layer 2
Large amounts of…