Understanding Rising Gas Prices on the Ethereum Network

21 Aug, 2020
Understanding Rising Gas Prices on the Ethereum Network

Gas prices are taking center stage on the Ethereum (ETH) network and we’re not talking about petrol.   “Gas” - or the cost miners charge to perform a transaction on the Ethereum network - has been steadily rising this year, up more than 3,600 percent this year, only to level off this past week. While the gas story can be complicated as many factors are influencing the uptick in this fee, breaking it down can help traders make smart moves in the extremely active crypto market.

The best place to start to understand gas is to understand miners. In this year’s bull market, they’re firmly in the driver’s seat when it comes to setting the gas price.  Mining, after all, is all about supply and demand. When traders want to execute an order on the Ethereum network, they’ll offer a gas price for the transaction.  If they want a fast turnaround, they’ll usually offer a higher price.

Miners, who are in business to make money, will either accept the price or decline the transaction and move onto another one with a higher gas price. Currently, gas on ETH transactions is hovering between 99 Gwei for slower transaction times and 109 Gwei for transactions confirmed in less than a minute.(Gwei stands for gigawei, which is 1,000,000,000 wei, the smallest unit of ether).

So what’s driving the surge in gas prices?  While no one can point to any one specific factor, there are several major movements in the crypto market that can impact how much you’ll pay for a fast turnaround on the Ethereum network:

Surge in DeFi – Decentralized Finance tokens are experiencing a banner year as more traders are realizing the value of owning – and lending – these altcoins. In August, DeFi accounted for more than 65% of gas, the majority of which was spent on decentralized exchanges or DEXs. More than $4.71 million USD is currently locked up in DeFi as traders speculate on continuing demand for investment tools created on the network. As interest in DeFi coins continues to grow and more traders jump in, DeFi is expected to be a major contributor to congestion on the network.

Interest in Stablecoins –  Tether (USDT), one of the first stablecoins in the crypto market, is experiencing higher demand in recent months.  In fact, Tether, which is pegged to the US Dollar, accounted for more than 14% of all fees spent in August according to an analysis by Glassnode.  The coin’s market cap has more than doubled since March to $10 Billion USD, making it one of the biggest stories on the Ethereum blockchain this year.

Arbitrage Bots – These busy automated players are also creating continuous activity on the platform and are estimated to have taken up 20% of gas this month a Glassnote analysis noted.

ETH Activity – Traders, buoyed by the dramatic rise in Bitcoin (BTC) this year and the interest in DeFi, pushed the price of the ETH token to record highs before pulling back in this week’s market downturn.

Gas consumption on the network is the subject of analysis and speculation on dozens of blogs, crypto sites, and social media.  In fact, if you really want to get granular on the topic, just visit a site such as etherscan.io and you can not only get estimates on the current gas prices (slow, medium and fast conformation times), you can also see exactly who is guzzling gas.

While the gas surge is great for miners, it could be putting a damper on the release of new applications on Ethereum, as higher gas could price some developers out of the market or hold others back.

“Everyone in DeFi was all over the place, including us, the last couple of days due to the insane gas cost,” said Peter Chan, a trader at firm OneBit Quant, in an interview this week with CoinDesk.

Traders are waiting to see if the recent announcement by Tether that USDT would now be transferred on the OMG network will help alleviate congestion on Ethereum, which could ultimately help to reduce gas fees.

“By migrating USDT value transfers to the OMG Network we save costs, drive performance improvements and relieve pressure on the root chain network,” said Tether CTO Paulo Ardoino. “This is good for Bitfinex and our customers, and the whole Ethereum ecosystem.”

Will the move by Tether bring Ethereum traders’ relief in gas prices?  That remains to be seen.  But for now traders are carefully watching the gas meter, looking for signs of relief. Much like petrol, supply and demand will continue to drive transaction costs.  If the bull market continues to dominate this year, traders should be prepared to face continued premium prices for gas.

Joyce Pavia Hanson