Ether Network Fees - Traders Can_t Afford It

2021-05-21, 08:18

May 19th was a day of plummeting digital currency markets, and for many users who trade on Ether, the situation may be worse than for other investors. In addition to the losses caused by the devaluation of the currency itself, they also had to pay network fees in order to make withdrawals on Ether. And it was on May 19th that Ether's network fees reached an all-time high, becoming unbearable for many traders in the face of the “cryptocurrency crash”.

What is the network fee?

Ether is not only a digital currency, but also a computing platform with on-board smart contracts. On Ether, users can develop and build their own applications, such as decentralized exchanges, lending platforms and blockchain oracle (*Blockchain oracles are third-party services that provide smart contracts with external information. They serve as bridges between blockchains and the outside world.) etc. And when users carry out activities in these smart applications, they all need to be recorded on this blockchain of Ether.

Instead of providing a service to record transactions, Ether developers let miners do the recording and charge users a miner’s fee. The miners’ fee for recording their own transactions is the network fee of Ether. For example, if a user makes a crypto coin swap on Uniswap, a decentralized exchange on Ether, and he needs to record the information of this trading, he needs to pay a network fee to the Ether miner.

The network fee to be charged by Ether for each operation can be calculated by the following formula.

Network fee = Gas unit price * Gas usage

Gas is a unit of workload measurement on Ether, which is used to measure the amount of work a miner needs to complete a specific operation. For example, to record a trading, a miner needs to pay 30 Gas workload. Gwei is the price unit of Gas, which represents the payoff a miner should receive for working one Gas workload. Gwei value is tied to ETH, and the value of 1 unit of Gwei is equal to 0.000000001 Ether value.

How expensive can network fees be?

The pricing mechanism of Gas determines that the price of Gas is not fixed, but adjusted according to the demand of Ether users. Each time a user performs an operation, he or she needs to pre-set the unit price of Gas he or she is willing to pay for this operation. At the same moment, the Ether system will receive many operations pending orders from users, and the system will sort these orders strictly according to the Gas unit price, and miners will choose the order with the highest Gas unit price to process first. Users have to raise the Gas unit price if they want their operations to be executed before others. The more people like to execute operations as soon as possible at the same time, the more fierce the competition is, the higher the Gas unit price will be.

When there are more and more Ether users and each user is seeking timeliness, the unit price of Gas will be higher and higher. However, the computing power of Ether is limited. When users pay a high amount of Gas, it will just let miners prioritize their own operation records, and it will not speed up the miners' records. So, the more users of Ether, the more operations on Ether, the more expensive each operation will become. The whole network will become slower.

Meanwhile, Gas is denominated in Gwei, which rises as the price of ETH goes up. When ETH appreciates outside the cryptocurrency market, the cost for users to operate on Ether also rises. According to Gas Now, when the digital currency plunged at 9 pm on May 19, the average Gas cost on Ether had reached 1,265 Gwei, and the price per unit of Gas had reached $0.0034 based on the ETH price at that time. This value may seem small, but to perform a coin swap on Uniswap V2 consumes about 105,000 Gas, which means that for each swap trading, users have to pay an average of about $36 in network fees. Centralized exchanges such as Gate.io briefly shut down their Ether and ERC20 charging and withdrawal services in order to avoid over-reliance on Ether for token charging and withdrawals by users in a panic, increasing trading costs for exchange users.

Average Gas Price per Unit on Ether
Data source: GasNow

ETH price Trend
Data source: Gate.io

Despite the 519 crash, Ether prices are at historically high levels, and network fees for operating in Ether remain higher than ever.

The Warning of “May 19th Event”
During the May 19th crash, the network fee on Ether was also at a record high. Users, dominated by panic, frantically crowded into trading cryptocurrency on Ether. And many investors suffered even greater losses due to delayed trading. This may be the first time that many investors have suffered the cost from the congestion on Ether. And I'm afraid the magnitude of the cost this time will make more people realize the limitations of Ether. The price takeoff of Ether after 2021 is closely related to the big explosion of the DeFi project. After May 19, investors' attitude towards the digital currency market may be more conservative in a short period of time, while the congestion and high network fee for Ether may become another group memory, perhaps changing investors' attitude towards Ether and even DeFi projects. After May 19, Ether on the total locked position of DeFi projects has decreased by 24.83% after May 19. After all, in a cryptocurrency market where "black swans" are like migratory birds, market risks can be forgiven, but technology risks may not be acceptable.

Author: Gate.io Researcher: Charles Feng Translator: Quinn Zhao
*This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.

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