Oil prices may have crashed in the global economy this week, but gas prices in the cryptoeconomy have acutely spiked in kind.
Simply put, gas is a pricing unit: it’s the amount of ether (ETH) a user pays to perform a given activity, or batch of activities, on the Ethereum network. These gas prices are typically denominated in “gwei,” or one-billionth of one ETH, and they’ve been relatively inexpensive for a while.
That all changed on March 12th, when average gas prices temporarily spiked to over 100 gwei per transaction for a 900 percent increase from the ~10 gwei average seen just one day prior.
Sell-Off Activity Frenzy
Plenty of de-risking sell pressure has swept through the risk-on cryptoeconomy this week amid U.S. equities being schellacked over the breakout of a Russia-Saudi Arabia oil price war and the coronavirus becoming a global pandemic.
After America’s top stock indexes came to the brink of bear-market thresholds on March 11th, they careened decisively through them one day later, which rippled out another cryptoeconomy sell-off on Thursday.
As such, many crypto traders fled into the relative safety of stablecoins on DEXes or fiat via crypto exchange off-ramps in order to hunker down from the market chop. That dynamic, combined with a spate of DeFi lending position liquidations caused by the rapid intraday ETH price drop, created a bottleneck of congestion on Ethereum.
Indeed, at one point on Thursday the congestion became so marked that gas tracker site Eth Gas Station temporarily recommended a gas price as high as 119 gwei for “slow” transactions.
DeFi Liquidations Spike
The lending arena is the most popular of the sectors in Ethereum’s fledgling decentralized finance ecosystem to date. Therein, users can put down crypto collateral in top dApps like Maker and Compound in order to take out automated loans powered by the Dai stablecoin.
It’s powerful stuff, but the flip side is that these lending positions get automatically liquidated via smart contracts if prices sink to the point that their posted collateral isn’t enough to keep them above water.
Accordingly, as the ETH price fell more than $50 on March 12th, more than a few open Maker and Compound positions became undercollateralized and thus were liquidated on-chain, a dynamic that contributed to the day’s acute network congestion.
To put the situation further into perspective, Thursday saw the Compound platform undergo more liquidations — nearly $5 million USD worth intraday — than it ever has before.
Another contributor to the temporary congestion was DeFi margin trading and lending exchange dYdX, whose users also faced liquidations on their leveraged positions. This reality has led to a flurry of activity on the platform, of which dYdX has paid for as it still covers its users gas prices.
Making Special Maneuvers
In response to Thursday’s network congestion, the dYdX team temporarily instituted a minimum trade size limit of 10 ETH, or ~$1,370 at press time, in order to discourage superfluous activity and mitigate further congestion.
Other dApps made similarly acute responses. For example, DeFi liquidity aggregator Kyber Network altered its maxGasPrice parameter to 100 gwei, then 200 gwei, and then 300 gwei “due to network congestion and the recent volatility.” The move made it so that Kyber users couldn’t worsen the network’s acute condition with extremely high-gwei transactions.
Even the social token space wasn’t immune to the digital traffic jam. As the latest network congestion episode was peaking, the social money app Roll temporarily paused withdrawals.
Such maneuverings won’t be necessary in a few years’ time once Ethereum’s more advanced scaling technologies are up and running. Until then, though, these kinds of demand incidents will remain in play.