Every Ethereum transaction requires a sum of ETH, denominated in “gwei” and dubbed a gas payment, in order to be processed. And as Ethereum’s decentralized finance sector is currently catching fire, demand to use the smart contract platform’s infrastructure has exploded.
In turn, the growing competition for Ethereum blockspace has recently pushed up gas prices to painful heights. Just last month, users groaned at the blockchain seemingly entering the 100 gwei era, amid which sub-100 gwei prices appeared unrealistic going forward.
Indeed, a gas price of 100 gwei roughly equates to $0.8 right now, and many Ethereum activities are composed of bundled series of transactions, so that charge can really add up even just for a single activity.
Fast forward to this week, and the blockspace frenzy has only intensified. At the time of this post’s writing on Wednesday, August 12th, the average Ethereum gas price was a whopping 287 gwei according to ETH Gas Station. That’s roughly $2.30 per transaction!
So What’s Going On?
In a macro sense, general usage of Ethereum has been uptrending all year as various ETH-centric sectors like DeFi, NFTs, and social money have been picking up serious steam as of late.
For example, Ethereum’s 30-day moving average of transaction fees has been outpacing Bitcoin’s 30DMA for going on nearly two months straight.
Ethereum's 30DMA of fees has been higher than Bitcoin's for 53 days now. Ethereum's 30DMA fees are currently about 40% higher than Bitcoin's. pic.twitter.com/h8CXjp3u2H
— Larry Cermak (@lawmaster) August 11, 2020
A big part of the recent surge of transactions has been the arrival of the “yield farming” craze in DeFi, where projects reward users with governance tokens for using their protocols.
And what we’ve seen lately as yield farming has taken off is that users are tending to rove from one hot yield farming campaign to the next as they’re released. The result has been massive acute migrations of capital to in-vogue projects of the day. This week, that project was Yam Finance and its YAM token.
YAMblers, All of Us!
First publicly unveiled on Monday, August 10th, and then launched unaudited one day later, Yam Finance is latest protocol to take DeFi by storm.
“At its core, YAM is an elastic supply cryptocurrency, which expands and contracts supply in response to market conditions, initially targeting 1 USD per YAM,” the team explained in its introduction post.
To accomplish this model, Yam’s builders took a Frankenstein-like approach and blended key parts from other DeFi protocols. Some of the main inspirations included Ampleforth’s elastic supply, Synthetix’s Mintr staking system, and Compound’s governance module. The ensuing creation is a money experiment that rewards its early users with YAM tokens.
Such a melding was enough to capture the attention of yield farmers across the world, as the project had already amassed $560 million in its staking contracts within 30 hours of its launch.
Yet as hundreds of users have surged into the project at once, the pressure on Ethereum gas fees have only worsened. As such, the costs to start staking on Yam or to withdraw YAM rewards are unfeasible for more than a few.
All Signs Point to Bull?
There’s no question that gas prices in the 300 gwei range acutely box out non-whale users from using Ethereum dApps.
But the flip side to this dynamic is that such prices show Ethereum is becoming a newfound center of activity in the wider cryptoeconomy where a significant amount of users are willing to pay extreme gas prices just for the privilege of using Ethereum blockspace.
In this increasingly bullish market, such fees might ultimately prove insignificant compared to the returns made possible through yield farming, for instance, which could in turn lead to more buy pressure around crypto assets in general.
The good news is that Ethereum’s layer-two scaling ecosystem is on the verge of a breakout, but that breakout is still a few months away. In the meantime, gas pains seem poised to continue.