As I’m sure many of you have noticed by now, gas prices on Ethereum are at their lowest levels in months with “rapid” transactions falling under 40 gwei over the weekend! Now, there are a few reasons for this (as I outlined in the tweet below) so I wanted to go into detail about each of them in today’s piece.
The most obvious driver of lower gas prices, and probably the most impactful, is the 20% increase in the gas limit (which happened around 4 days ago). For those unaware, the “gas limit” is essentially the block size on Ethereum and obviously the larger the blocks, the more transactions we can fit into them. Though it’s important to understand how gas on Ethereum works and why it differs from how something like the Bitcoin blockchain handles transactions so I suggest reading this piece that I wrote back in June of 2020 to get the full picture. It’ll be interesting to see how long it takes the network to adjust to this increase in gas limit and just start bidding up the gwei price again to take advantage of the increased capacity.
Next up we have Flashbots which you may have heard about a lot lately - basically what Flashbots does is allow those interested in extracting miner extractable value (MEV) from the network to essentially bypass the public transaction battleground (aka the mempool). In plain English, this means that MEV extractors are not competing with regular users to get their transactions included in a block - they are simply going directly to miners. What this leads to is decreased competition for transaction inclusion in the public mempool which then leads to cheaper fees for regular users.
Layer 2’s and other chains have been taking the load off of Ethereum’s layer 1 lately as well. Last week I wrote about how Immutable X is saving users millions of dollars in gas fees already but they are definitely not alone here - there are many other solutions now live that all work to take pressure off of layer 1. Of course, these solutions are still paying layer 1’s gas fees for their security but because they are “rolling up” transactions on layer 2 and then by posting just 1 transaction periodically to layer 1, they are significantly reducing the load on layer 1. In addition to this, other chains have acted as a “pressure release valve” for Ethereum by allowing users to have a similar experience with DeFi as they would on Ethereum but with much lower fees (and also usually in a centralized environment).
Lastly, we have the fact that the market has been relatively quiet lately across the board (and especially over the weekend). This naturally leads to lower activity on the Ethereum network which of course leads to lower gas prices. I expect that as the market heats up, we will see gas prices spike above 100 gwei again and may sit there for quite a while (especially if we get a “DeFi summer round 2” that people are clamoring for at the moment). All in all, it’s nice to see that the Ethereum network has multiple ways that it can reduce fees over the short-term but long-term the path is still the same: almost all users will eventually sit on layer 2 with layer 1 being reserved for whales and layer 2 proofs.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.