The tremendous rise in Ether price has led to transaction gas prices becoming unaffordable for small Eth transfers. This beats one of the very purposes of why cryptocurrencies were created – to eliminate middlemen and the high costs of money transfers. This article takes a deep dive into the Ether network and reveals what lies in the near future.
What’s Ethereum all about
Ethereum (or Ether) is an open-source, blockchain-based, decentralized software platform used for its own cryptocurrency, ether. Ether (ETH) is the native cryptocurrency of the platform. Vitalik Buterin is the founder of Ether; this project was proposed in 2013, development was crowdfunded in 2014, and the network went live on 30 July, 2015, with an initial supply of 72 million coins.
Ether enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control, or interference from a third party. Also, Ether is not just a platform but also a programming language (Turing complete) running on a blockchain, helping developers to build and publish distributed applications.
Ether can be used to “codify, decentralize, secure, and trade just about anything.” One of the big projects around Ether is Microsoft’s partnership with ConsenSys which offers “Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure so Enterprise clients and developers can have a single click cloud-based blockchain developer environment.”
ETH Gas explained
The Ether network requires gas to operate successfully. Gas refers to the cost necessary to perform a transaction on the network. The price of gas is set by Miners based on supply and demand for the computational power of the network needed to process smart contracts and other transactions. Besides, gas refers to the unit that measures the amount of computational effort required to execute specific operations on the Ether network. Since each Ether transaction requires computational resources to execute, each transaction requires a fee.
Gas fees are paid in Ether’s native currency, ether (ETH) and are denoted in Gwei, which itself is a denomination of ETH; each Gwei is equal to 0.000000001 ETH (10-9 ETH).
One GWEI is worth 0.000000001 ETH.
The fee required for every computation executed helps to prevent people spamming the network and, to prevent accidental or hostile infinite loops or other computational wastage in code, each transaction is required to set a limit to how many computational steps of code execution it can use. Transactions includes limit, any gas not used in a transaction is returned to the user. Therefore, the gas fee helps to keep the Ethereum network secure and the fundamental unit of computation is “gas”.
Gas cost and Gas price are determinate factors in determining how much fee will be paid per transaction(s).
There are different transactions done by users using the Ethereum network, and each requires different amounts of computation. We have simple and complex transactions. A simple transaction is a token transfer which requires relatively small amounts of gas. For instance, a simple ETH transfer takes 21,000 gas while complex transactions require multiple smart contract interactions which need a larger amount of gas. Executing trades on a decentralized exchange can cost 100,000 gas or more.
This is the maximum amount of gas that a user is willing to use for a single transaction. Ether gave its users the opportunity to specify their desired gas limit when sending a transaction. It is important to note, changing the gas limit does not change the actual amount of gas that is needed to execute an operation. The gas limit helps to safeguard and protects users from dapps that may try to unknowingly use a lot of gas and any unused gas below the gas limit is returned to the sender’s wallet. Setting the gas too low means the transaction will not be executed but they will still be charged the fee.
According to a CoinMetric report, Since January 2020, the amount of gas used per transaction has trended downwards. This shows that increased transaction complexity is not responsible for high transaction fees.
The gas price only determines the amount the user pays per unit of gas used and does not change the amount of gas needed to execute the transaction. Users can specify any gas price they want, either high or low. Also, gas price tends to fluctuate and is dependent on the demand for block space. The growth of decentralized trading, on-chain arbitrage, yield farming, and new token launches all contributed to a sharp rise in competition for transaction priority, which led to escalating gas prices.
Reasons for high transaction fee
According to the African Lead at FTX, Adebayo Juwon, “Sometimes, a transaction can experience a delay or total rejection if it does not meet the miners’ threshold. This threshold is dependent on two factors-network usages and congestion. Congested networks benefit miners more as they can charge excessive-high gas fees”. “Paying as high as a $60 fee on a single Uniswap transaction or a $10 to $40 fee just to withdraw an asset from a cryptocurrency exchange nullifies one of the important goals of blockchain technology which is ensuring minimal transaction fees as compared to traditional financial systems”.
According to a CoinMetric report, part of the growth in gas fees has been due to the sharp increase in Ether price. As Ether gets more valuable, gas fees get more and more expensive when measured in USD. But it’s also due to a large increase in gas prices caused by network congestion. Also, Ether’s gas price rise corresponds with the rise of DeFi, which is still likely the largest contributor to high gas prices.
Solution: EIP-1559 and ETH 2.0
The surge in transaction fee has been a major concern and Ether Improvement Proposal (EIP) 1559 has been proposed to fundamentally change Ether’s gas mechanism. Users will no longer have to specify gas price, Ether transactions will have an algorithmically computed base fee. The EIP-1559 will also introduce a new block target size mechanism, which will aim to keep blocks from consistently reaching maximum capacity. EIP-1559 will introduce an algorithmically computed price (per unit of gas) called the base fee. Transaction senders will be required to pay the base fee for their transaction to be included in a block. That is, the system will automatically quote a reasonable price to users, and they will be able to choose whether they want to pay an additional fixed tip, instead of having to set up bid to compete to be the first to be recorded in blocks, as in the past.
Besides, instead of getting paid to miners, the base fee will get burned. That is, blockchain as we all know is a distributed ledger where transactions can only be confirmed on the chain after miners package the block for ETH as rewards. Miners under the current ETH mechanism receive nearly 8 ETH as rewards in each block, of which 2 ETH are automatically generated by the block, and about 6 Ether are transaction fees from the block. Miners’ fixed transaction fees under Ethereum Improvement Proposal (EIP) 1559 will be burned in favor of tips, which is given by the system in default. This act will effectively decrease the overall Ether supply and result in deflation compared to the previous growth rate.
Note: When sending a transaction, users will set a fee cap. The fee cap is the maximum fee that the sender is willing to pay, including both the base fee and tip. If the fee cap is lower than the base fee, the transaction will not get included in a block. If the fee cap is higher than the base fee, the difference will be sent to the block’s miner as a tip.
If blocks are consistently full, tips may function similarly to the current gas mechanism where miners are incentivized to include transactions with a high gas price. However, EIP-1559’s target block size mechanism will hopefully keep blocks from reaching maximum capacity for extended periods.
However, high transaction fees are fundamentally a scalability problem and EIP-1559 will not fix the high gas price(s) that Ethereum’s users are battling with. EIP-1559 will help to improve Ether’s user experience by making fees more predictable. It will also help to reduce variance in gas fees and give users a clearer picture of the actual fee they will need to pay. To solve the problem of high transaction fees over the long term, Layer -2 (L2) scaling solutions and Ethereum 2.0 will be needed to address this. Through various means, scalability solutions will increase the number of transactions that can be processed per block, which will help relieve the congestion contributing to high fees.
Ether 2.0 comes with great speed, efficiency, and scalability and it is an upgrade to the already existing Ether blockchain. Ethereum 2.0 will address the issues of transaction fees and increase in the number of transactions. As an upgrade to the current version, there are some fundamental changes in structure and design as compared to its previous version. These changes will help to understand the functioning of Ethereum 2.0 which can also be referred to as Eth2 or Serenity. The changes that Eth2 comes with are:
- Proof of stake
Proof of stake consensus mechanism makes use of validator instead of miners, and their role is to propose new blocks, provide computing power, storage, and the bandwidth to validate transactions. Validators are given periodic payouts in Ether and there is a deposit contract of 32 Ether that should be locked in by these validators. This act is a type of security deposit that gets forfeited fully or partially in an event of any malpractice.
The process of splitting one blockchain into multiple blockchains is known as shards. This helps to make the entire network more efficient as a single validator does not have to handle the workload alone. Validators works with information related to their shard and validators are shuffled between shards regularly to avoid any kind of manipulation. The means of communication and coordination of shard is the Beacon chain.
The important aspect of Eth2 is the validators, as they are solely responsible for Eth2 infrastructure and maintenance. There are two keys that every validator must have:
- Signing key
- Withdrawal key
Signing key is used to perform “work of the blockchain.” While the withdrawal key performs “actions on the funds.” Signing key must be online 24/7 and the withdrawal key does not have to be available always. It is very paramount that the withdrawal key must be secured as the person has control over the funds.
The validator has three main functions which are:
- Proposing and adding blocks to the Beacon Chain or one of the shard chains.
- Attesting the validity of the beacon and shard chain.
- Reporting malicious behavior by other validators.
To be a validator, you need to lock up 32 Ether in the beacon chain; and validators do not work alone – they mostly work in committees wherein groups of minimum 128 validators vote on the head of the blockchain.
Proof of Work v/s Proof of Stake
Ether 2.0 has a brighter future compared to its counterpart because of the consensus mechanism which they use. It uses a proof of stake (PoS) mechanism while Ethereum uses a proof of work (PoW).
Proof of work: The mechanism is an energy-intensive process in which complex mathematical puzzles are decoded by miners with the help of computer hardware processing power. PoW is used to verify new transactions and whoever decodes the puzzle first, adds a new transaction that contains the previous transactional records making up the blockchain.
Proof of stake: Validators will verify transactions instead of miners. Forging or minting takes place when a majority of validators claim to have seen the block, it is added to the blockchain and they are rewarded for conducting the block proposition successfully.
It is important to note that PoS has more energy-efficient machines and it uses less computing power to secure a blockchain compare to PoW.
Ethereum 2.0 is also significant in scalability and it will be able to conduct up to 10,000 transactions per second. The implementation of shard chains speeds up the network and can scale more easily as the transactions are handled in parallel chains instead of consecutive ones; delay and network congestion will be eliminated. Safety in the entire transaction process is guaranteed and a large set of validators will be required, approximately 16,384 validators will be needed which will make the network more decentralized, secure, and less prone to manipulation.