Why are Ethereum fees so high？

[TL;DR]

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The Ethereum network, the very first in smart contracts and ERC-20 based, has very expensive and slow transactions compared to other blockchains.

Its exponential growth over the past few years has taken a toll on fee prices which were prioritized according to the highest bidders before the EIP-1559 update that turned it into an automatic system.

But the main reason for the high fees over the past two years has been the rise of DeFi. Since Ethereum created smart contracts, most of DeFi projects are based on its blockchain and, therefore, all its tools function under the network - staking, lending, earning, liquidity pools, yield farming, NFTs, you name it.

The EIP-1559 update greatly improved fees, although they are still expensive and even more expensive in moments of high traffic - now diluting the costs across the entire network instead of using its previous bidding system.

Upcoming updates such as Ethereum 2.0 bring hope to improving the issue, although according to co-founder Vitalik Buterin, another substantial update might be years away.


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If you have ever traded the Ethereum token or any ERC-20 based token from the Ethereum network, you have definitely noticed something very discrepant to this blockchain compared to others: Ethereum transaction fees are extremely high.

And they seem to be only getting higher, as the network tries to scale while dealing with the increase in demand. But what causes Ethereum fees to be so high, and is there a solution to the problem?

In this article, we’ll go through the details of Ethereum fees, how they seem to be only getting higher and what can be done to solve the issue.

What are gas fees?

Operating in the Ethereum network seems to be getting more and more expensive by the day. It’s not rare for transactions to cost 30, 40, sometimes even $100 dollars - regardless of the actual value being transferred.

This factor has a direct correlation with gas fees, which play an important role in Ethereum’s network.

Operating in the Ethereum network seems to be getting more and more expensive by the day. It’s not rare for transactions to cost 30, 40, sometimes even $100 dollars - regardless of the actual value being transferred.

This factor has a direct correlation with gas fees, which play an important role in Ethereum’s network.

Gas fee is related to the work that’s been done on the network. The measurement of that work is known as a Gas Unit. Since there is a limit to the number of gas units that Ethereum is able to process at once, those who mine with their hardware in the network must select the primary operations that they’ll execute, otherwise it can flood the blockchain and bring blockchains to a halt - which has not happened thus far.

This so-called filter for Gas Units takes into consideration how much each miner participating in the network will receive for the transactions, a factor which is labelled as Gas Price.

Therefore, those who seek to prioritize their transaction in front of others must pay a higher Gas Price for it. If on the contrary, you’re not in a hurry to send or receive a transaction, the order will stay in a pool of several low-reward transactions until a miner picks it. However, such a method runs the risk of the transaction being cancelled, in which case you must through the order process again.

It’s no coincidence that Ethereum is going through major challenges in its transaction fees. As of recently, the Ethereum network processes an average of 1.2 billion dollars in transactions per day, having recently reached a peak of 1.7 billion dollars in May of 2021. That’s a lot of transactions.

But the increasing adoption of the Ethereum crypto is not the only reason why the network is getting such high demand. There’s also DeFi, the booming crypto ecosystem which can take large blame for it.

How DeFi made Ethereum more expensive

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The thesis here is simple: most of DeFi still operates within the Ethereum network. As DeFi grows, demand for the Ethereum blockchain grows with it.

The DeFi boom experienced in the market over the past two years drastically increased the number of transactions and, therefore, increased overall gas prices in the network as more users tried to gain priority for transfers. In the consensus scale of gas fee average, it made Ethereum much more expensive.

Of course, the Ethereum network is not sustained by mere transactions: what made this project so groundbreaking in the first place was the creation of smart contracts, which allowed the DeFi ecosystem to exist. That’s because, beyond demand from transactions, DeFi congests the network with the several functionalities now present in Decentralized Finance: staking, lending, liquidy pools, yield farming, lotteries, NFTs, you name it.

Therefore, ethereum transactions + DeFi transactions + DeFi smart contracts and platforms created a snowball effect of increasingly higher fees. As these projects grow and more ERC-20 based tokens surface, it will only make the problem more apparent.

With those factors considered, what is the solution?

The EIP-1559 update, or London Hard Fork

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In development for years and officially released in August of 2021, the London Hard Fork introduced several major improvements and gradual incrementations to the Ethereum network, including how network fees are defined.

The proposal sought to make transactions more efficient while also making Ethereum more scarce. Until then, the blockchain had an acution system, as previously stated, which determined which transactions would go through each block.

The more a user was willing to pay, the higher the fee and the more users in general using the network, the fee was also higher. Therefore, users always had to take into account how congested the network was at that moment to decide if they actually wanted to go through with transactions or not.

When Ethereum had its London Hard Fork, this auctioning system was replaced by an automatic transactional structure that caused fees to be seemlessly charged without the need for manual input. Also, a tipping mechanism was introduced that provides a peer-to-peer connection between users and miners - users still willing to pay more for the transaction, despite the new automated system, can pay miners directly for it. There’s also the option to set up a limit fee so the transaction is canceled if the pricing gets too high.

There was a strong belief that this new system would allow Ethereum transactions to be much cheaper. Although transactions have become a bit cheaper and users now have the choice to set pricing limits on them, Ethereum is still the most expensive network to operate on.

There is, however, another option that may change fees for the better, permanently.

In conclusion

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The Ethereum network was come a long way since its launch back in 2015, paving the way for smart contracts to dominate the mainstream and change how the world views cryptocurrencies and their utilities.

Although the London Hard Fork update improved the network’s usage and fees, there still is a long way to go until Ethereum can compete with alternatives in the market. Speed is also another issue that must be covered, one that Ethereum addresses in its upcoming update 2.0, now called Consensus Layer. If co-founder Vitalik Buterin’s predictions are right, however, Ethereum 2.0 might be up to 7 years away.

Regardless, as the second most popular network since its year of release, it is very clear to the market and its users that Ethereum is here to stay - it’s getting more and more users every day, with no signs of slowing down. With the blockchain getting faster and much cheaper transactions, however, Ethereum will reach a whole new level - that of a trustless, frictionless giant that may one day take the podium as the number one crypto in the world.



Author: Gate.io Researcher: Victor Bastos
* 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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