Ethereum’s EIP-1559 Won’t Solve The Gas Fee Crisis

The Ethereum community still suffers from higher-than-ever transaction fees which went through a five-fold increase just from the start of 2021.

According to a report published by Coin Metrics, the median gas fees on Ethereum’s blockchain are consistently sitting above $10 for most of the time of 2021. Coin Metrics compared the gas fee with late 2017’s crypto bull run, where the price per transaction reached a mere $5.70.

Comparing gas fees and price increases for the altcoin leader, the report also showed that Ethereum’s price increased 125% since the start of 2021, while gas fees exploded over five times to 532%, if looking at the median transaction costs.

Different actions on the Ethereum’s blockchain require different amounts of gas. For example, a simple ERC-20 token transfer is much more cost-efficient than complex smart contracts, like those of the DeFi realm or, in particular – the automated market maker (AMM) ones. Despite DeFi being among the top gas guzzlers, the root cause is not in the operational mechanism of decentralized finance applications. It is rather on account of the large transaction volumes.

“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 report noted.

Ethereum introduced transaction auctioning, which puts transactions with larger gas usage with minor priority over transactions with lower gas limits. However, data from Coin Metrics shows that the current gas fee price increase is due to block fullness, which remains above 95% since the mid-2020 DeFi boom. Furthermore, in February and March, block fullness reached 97%-98%.

Source: CoinMetrics

Furthermore, miners need to specify which transactions to process, due to the limited number of transactions per block (around 160 to 200).

“Miners naturally prioritize the transactions with the highest gas prices since they will earn them more money if these transactions are included,” the report added.

Coin Metrics disagreed that the highly anticipated EIP-1559 network upgrade would alleviate gas fees. According to the research company, the proposal, designed to alter the auctioning mechanism by introducing gas fee burning, won’t yield the much-needed results.

“If Ethereum can only process a few hundred transactions (on average) per block, there’s going to continue to be high fees as long as DApp usage keeps increasing. Gas prices will continue to be high as long as there’s high competition for block space,” CoinMetrics concluded.

Meanwhile, experts are hoping that the upcoming Uniswap v3 can help alleviate the ethereum gas crisis since the AMM is responsible for a big chunk of the transactions happing on the ETH network. Others disagree and state that even with the v3 improvements, the gas cost of swaps on Ethereum mainnet will be only slightly cheaper compared to Uniswap v2 and this won't solve the crisis.