One of the most prominent accounts over recent weeks has been Ethereum’s remarkably high transaction fees.
Although the blockchain has witnessed a sharp uptick in active users, transactions, and network utilization due to DeFi, the cost to send transactions has increased, and expanded dramatically at that.
Following is a screenshot I took of EthGasStation — an Ethereum transaction fee tracker — in Jul. 27, as Bitcoin shot over a dozen percent more potent in a single 24-hour period.
At 130 Gwei — an estimation of Ethereum transactions’ cost — simple transfers of ETH cost over $1.00. In the variation, complex smart contract transactions cost upwards of dozens of dollars.
Although transaction fees have fallen since this screenshot was taken, the impression of high transaction costs remain.
Ethereum’s pessimistic network influence
When you catch the term “network effect(s),” most think it’s a necessarily positive thing.
Bitcoin’s growth is signified on network effects, such as Facebook, YouTube, and any other social media platform or monetary asset.
According to the managing partner of the Crypto Venture and hedge fund Multicoin Capital, Tushar Jain, Ethereum has arrived at a point where it has “negative” network effects. Amongst every new user, with every new application, the blockchain slows down and grows more costly.
“ETHEREUM 1.0 IS NOW FACING NEGATIVE NETWORK EFFECTS. EVERY NEW USER RAISES THE TRANSACTION COST FOR OTHER USERS,” JAIN EXPLAINED IN A TWEET PUBLISHED JUL. 27.
ETHEREUM 1.0 IS NOW FACING NEGATIVE NETWORK EFFECTS. EVERY NEW USER RAISES THE TRANSACTION COST FOR OTHER USERS.
ETHEREUM NEEDS SCALING SOLUTIONS NOW, OR THE NEGATIVE NETWORK EFFECTS WILL DRIVE MANY DEVS AND USERS AWAY.
— TUSHAR JAIN (@TUSHARJAIN_) July 27, 2020
Jain’s analysis is one recollective of two executives of Exponential Investments, a global investment firm with investments in cryptocurrency.
As published by CryptoSlate previously, Leah Wald and Steven McClurg from the firm said that the way Ethereum is structured is that the fundamental cause for the asset weakens as prices rise and when demand for transactions increases:
“In summation, as more users join, the cost of gas increases, the network clogs, there are potential security issues, which decreases the value of the service, leading to poor user experience, and therefore users drop off and move to other blockchains.”
Solutions are needed ASAP.
According to Jain, this unfortunate trend indicates Ethereum “needs scaling solutions NOW or the negative network effects will drive away many devs and users.”
Qiao Wang, a crypto analyst, has echoed this comment. Referencing how he spent lots of money and time trying to use decentralized finance products based on Ethereum, Wang recently [commented](https://twitter.com/QWQiao/status/1277281069784543232?):
“So long as ETH 2.0 is not fully rolled out, there’s an obvious opportunity for a highly scalable blockchain to dethrone Etherium paying $10 transaction fee and waiting 15 seconds for settlement is just bad UX. ”
Balancing resolutions that are being worked out include ETH2, arguably the most distant solution away, and so-called Ethereum “roll-ups,” a near-term answer that relocates transaction data off the main chain to minimize costs and improve speeds.
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