Ethereum's Gas Crisis
*Disclaimer: this is not financial advice and should not be viewed as recommendations to buy or sell any asset, this is purely educational and the information below is solely my opinion, please do your own research and develop your own conviction*
Typically when you hear of a gas crisis, you think of long lines at the pump after a natural disaster or a shortage overseas due to some kind of global issue.
But when it comes to our world of crypto, the gas crisis is directly related to people feeling priced out of Ethereum because of its fees to transact.
This has become a hot button issue lately with VCs on Twitter using it as their opportunity to pump their bags in search of exit liquidity.
I’m not going to spend my time here today writing disparaging comments about Zhu or 3AC, but I want to explain some of the flaws in the logic that was presented and help people realize why gas fees are so high, and what this next chapter of crypto represents for everyone.
I have long been critical of gas fees and the costs to transact on mainnet, although I am a big Ethereum bull, I am by no means a maxi. Instead, I am someone that can see things objectively and make a clear comment on what I believe is the best case scenario for everyone involved in our own little bubbles.
And that’s what this article is aiming to do, explain away the costs for gas fees, the need for L2s with tokens, and why the competing L1s may be good products for users, but not necessarily Ethereum killers.
Inflation at the Pump
Right now it seems miserable trying to use Ethereum to do anything beyond just sending ETH back to Coinbase or another wallet. And I totally get it.
It’s not fun trying to mint an NFT that costs .05 and paying the same amount or more in gas fees.
It’s miserable trying to make a swap on a DEX and it costs you more in gas than the ETH you’re looking to flip.
It’s impossible to play around in the world of DeFi when you’ll spend more in gas than you’ll make in interest at the end of the year.
I get it.
If you’re a small user, you can’t do any of these things without feeling like you’re being taken advantage of or beaten down by the taxman.
I’ve been hyper critical of the costs to bridge into L2s like Optimism and Arbitrum to make a bankless lifestyle possible for people with small sums of money.
I’ve been on the fence about whether or not the future of DeFi can lie within Ether’s grasp.
But the more I learned, and the more I thought about it, this dilemma is really just a major reflection of why Ethereum has the network effects and developer moat it does, and why its future is insulated from fud attacks and gas prices.
People who aren’t tech savvy or are new to crypto struggle to understand why gas fees are high. They think it's just a reflection of bad tech and greed, but it’s the exact opposite.
High gas fees are the result of high demand for blockspace.
What does that mean?
A lot of people want to use Ethereum and they are desperate to use it by any means necessary so they pay a lot of money to have their transactions be included in each block that’s being confirmed.
Think of it this way, if you’re still confused.
You’re at a pool party in Las Vegas and you need to use the bathroom. You walk over to the bathroom and there’s a long line full of hundreds of people. You don’t want to wait to be at the front of the line so you walk up to the bouncer at the bathroom door and offer him $20 to get in. The person at the front of the line, waiting, hears you saying that and says no, I’ll give you $30, and everyone down the line starts saying they will give the bouncer more money to go first. By the time everyone is done bidding on the bathroom space, the price to get in now costs hundreds.
That’s essentially what is happening on the Ethereum network.
There is an overflowing demand to use the network with people not willing to wait for things to get cheaper to use at a later time.
So why are other blockchains, like Solana and Avalanche, cheaper?
Well, without getting into too much technical jargon, it’s because there are trade offs being made in decentralization and security, with fewer people confirming transactions, and blocks being bigger (capable of fitting more information at once). To the average user this seems like nothing, and it’s exactly why Solana and Avalanche are attractive alternatives right now, but at the core level that matters most to the world of crypto, the base layer, a completely decentralized, fully secure network that cannot be turned off is imperative.
Imagine if at a certain point the bouncer at the bathroom decided to close the doors and not let anyone in, it would incite a riot and screw over the hundreds of people waiting to get in. When we have a small amount of validators and the inability to run a node at home, we have the potential for bad actors to do just that and halt the network or roll it back against the user’s will.
It’s not the permissionless, trustless, free market that we are trying to create. It becomes the same paradigm we are trying to disrupt and escape from and it leaves us further indebted in the throes of oppression.
This doesn’t mean we have to cast other chains away and ignore them, in fact that would be silly, non inclusive and a threat to innovation. Chains like Solana and Avalanche, which may not be as decentralized, and haven’t been battle tested with the level of hackers and traffic that Ethereum has faced, do possess certain qualities that are admirable and important.
A side chain like Solana and Avalanche decreases traffic to Ethereum for small transactions and gives users another viable option. If I’m looking to engage in some basic stable coin yield farming, and I’m only looking to deposit a few hundred dollars into a DeFi protocol or LP, I have a wonderful home here in either of these ecosystems, the same way I could have a nice apartment outside of Manhattan.
If you’ve ever been to New York City, or at least familiar with the stereotypes, you would know that Manhattan is one of the busiest, most heavily trafficked places in the country. It’s filled with natives, transients, tourists, visitors and workers. Ethereum is basically the same thing at this point. It’s the biggest city that we have inhabited in crypto. But as opportunities rise, traffic increases, and as traffic increases costs of living go up, and as costs of living goes up, it becomes harder to exist and do business on a smaller scale. So it forces people to leave the city and look for a home elsewhere. Whether it’s on the other side of the water in Jersey City, or a nice open plane in Connecticut, it encourages people to leave the traffic at the end of their work day and find new opportunities that make more sense for them financially.
These migrations elsewhere become people using chains like Solana and Avalanche, giving them the same type of experience as Manhattan, but not as polished and not as safe and secure. But because it’s just people living in one bedroom apartments, or a couple buying their first home, it becomes an ok place to start your journey as you figure things out.
But as nice as this experience is and can be, it does lack the same night life and experiences that you get from Manhattan. And the opportunities for your property to increase in value aren’t as high as possible. You see more panhandlers asking for money, there are more scammers on street corners, and you get the same knock off stores as you would in the city, but at a lesser quality. So you start to wonder what life would be like back in NYC.
And this is where L2s come in which are the actual answer to the speed and scalability problem plaguing Ethereum.
Moving to Queens and Long Island
So while New Jersey and Connecticut are looked at as moving to competing L1s like Solana and Avalanche, leaving Manhattan and heading east into the suburbs is equivalent to the migration to Polygon and Optimistic and zkRollups. Users aren’t leaving the Ethereum network, they’re simply moving 15 minutes plus away within the same state, which comes with benefits such as improved security and decentralization.
Since L2s are built on top of Ethereum, they inherit the same qualities and principles that make Ether the most sought after piece of real estate in the blockchain world. Sidechains like Polygon aren’t necessarily secured by the Ethereum network since they are technically secured by the MATIC token, but they checkpoint back to it which maintains that relationship. True L2s however like Optimism, Arbitrum, and soon StarkNet and zkSync are completely kmsecured by the Ethereum network.
So how do they work?
Rollups are a pretty cool advancement in cryptographic technology. They work by verifying the data off chain, and sending it back to the L1 to be confirmed.
What does this mean in plainspeak?
You know how you have a bunch of songs downloaded from your old days. And these songs are just scattered around all over the place. It’s pretty annoying to try and do anything with them, one at a time, right. But what you could do, to make things more organized, is you can quickly throw them all in a folder to have them located in one central location in a nice, neat package. But, of course, if you want to send that folder to someone, it will take a long time to clear over the internet and it’s a long, boring process that uses more computation than you desire. So what you do instead, you compress that folder into a zip or RAR file and send that instead. That clears instantaneously and now your friend has a bundle of all of this music on their end. All they need to do is extract the zip or RAR file, open the folder and begin playing the songs they want to listen to. Rollups work in the same way.
Rather than taking one transaction at a time, and sending it back to mainnet to be confirmed, they bundle hundreds, thousands, hundreds of thousands of transactions together, and when their set requirement is reached, they send the entire compressed load back on chain to get confirmed in one batch order, instead of a hundred thousand different orders.
Think of it this way. Instead of having a hundred cars on the road in this tight, one lane highway that’s always backed up with traffic, you can put all of those people into one bus, allowing the road to be cleared up of any congestion, and letting the bus run as free and as fast as it can possible go on its own.
That’s what rollups are doing.
They’re taking traffic away from Manhattan and putting it into Queens and Long Island where it can be dispersed more easily, while still maintaining access to the city for work and leisure pleasure.
Bundling these transactions into one batch at a time brings down gas costs for the user since it’s everyone pooling together and instead of paying $40 a gallon to fill up your individual cars, you’re paying $1 a person for admission onto the bus.
The only trade off here, however, lies in latency and the potential lack of decentralization early on.
So, at the moment, we have the potential for a latency issue where there may not be enough volume flowing into the L2s at once for them to send transactions back to the main chain in an immediate manner. If I submit my transaction on Arbitrum, it will be verified within .3 seconds, but it won’t go to the main chain at that very moment if there isn’t a heavy amount of traffic. Those batches may not be sent to the L1 for another five minutes or so, as they wait for the bus to fill up. This doesn’t affect me personally, but it does put a strain and stress on the Arbitrum network. However, as volume increases, latency decreases. If there are a billion people on a particular L2 at once submitting transactions, batches will be sent to the main chain almost immediately, with latency decreasing to the point of not being a real concern or issue. So scalability here, actually strengthens the chain and makes things stronger and safer as volume goes up.
The decentralization issue that currently exists, shouldn’t be ignored, but also shouldn’t be feared. Because it’s not centralization for a lack of ability, and it’s not a sacrifice of decentralization to maximize and improve throughout, it’s centralization at the mercy of immaturity. Because these L2s are still in their infancy, they aren’t actually in their real mainnet yet, they’re still in beta and slowly being rolled out with projects slowly being onboarded. And admin keys still exist as a cautionary measure to guide the project along the way. The plan, as always, is to burn the keys or hand them to the community. So unlike the other L1s where decentralization isn’t as doable because of issues with running nodes and validators, this is more of a planned obsolescence that will occur over time as the networks grow and mature, which brings us to our next point that is a necessity to end this gas crisis in a quick and easy manner.
Tokens.
Price Dictates Sentiment
Solana and Avalanche have the reputation they currently do because of the way their tokens have violently increased in price. This parabolic rise from pennies to hundreds of dollars acts as an elite marketing mechanism to gain mainstream attention and trigger mimetic desires to find the next bitcoin and Ethereum.
It’s stupid, but the cold reality is that no one actually cares about technology, decentralization or values. The main motivating factor for regular people on the periphery of crypto looking to get in is the ability to get rich quick. Nothing drives sentiment better than price + narratives. Make a bold claim that Solana and Avalanche are infinitely better than Ethereum because fees are low, support it with strong buy pressure that jacks the token price up to stratospheric valuations and people automatically assume and think they are the future of tech in this industry and that nothing else matters.
Because of this we see a disproportionate love toward L1s that are deemed Ethereum killers, and a lack of interest toward scaling solutions like Optimistic and zkRollups. The problem lies completely in the inability to properly market the alternatives to living in Manhattan but remaining in New York.
In order to fix this and drive traffic to L2s, the devs need to consider adding tokens and using them in liquidity mining programs, and allowing them to function as marketing tools, as well as tools for decentralization. Releasing a token will allow protocols to burn their admin keys and take a step back, and will reward early users. This extra bit of attention will make people aware of the alternatives and provide them with an option that solves the trilemma that plagues crypto.
Without a token, users will have no choice but to bridge to these other ecosystems, which is not an easy process for non crypto natives. Part of the allure for Solana and Avalanche is the ability to buy them on Coinbase and easily enter their ecosystems once those tokens are sent to their respective wallets. When you have an L2 that doesn’t have a native token that you can use as a medium of exchange to transfer value from the CEX to the network, it begins to become a complicated experience for new users that ultimately leads to paralysis and lack of adoption.
At some point CEXes will offer native on ramps into these L2s, but it could also become complicated and lead to mistakes and “lost money” when users don’t understand the different networks they are sending their Ethereum to. Everyone needs to understand that although crypto is growing rapidly, it’s UX is far from desirable and overall a bit of a process for non crypto natives.
Tokens remove some of this worry, while creating economic incentives for adoption and driving attention to their networks when price appreciates due to accumulation from large users looking to easily onboard into their networks without burning money on gas fees for bridging costs.
In addition, wallet providers like MetaMask should also have the different native networks preloaded into their wallets to make it easier for new users who aren’t aware of the steps needed to set up all of these different networks. But that is a different argument for a different day.
A Multichain World Without An ETH Killer
While some like to wax poetically about how Ethereum is going to get killed and destroyed because of gas fees, a lot of those comments come from ignorant people or those with ulterior motives lining their pockets. The reality is, we will have a multichain world the same way we have multiple telecom and ISP companies.
Avalanche and Solana are likely to remain relevant and important pieces of the crypto world. The only way they don’t maintain their presence would be a sudden abandonment of VC funding, or users ditching them after a severe hack or blockchain issue.
At some point, they may see scaling issues as they potentially reach the level of traffic that Ethereum possesses. This could lead to them evolving into rollups for Ethereum, or developing their own layer 2 plans.
But they aren’t going to completely dethrone Ethereum and kill the network effects and developer moat that currently exists.
Why?
Composability.
At the moment, everything is being built on TOP of Ethereum. Everything we see is an evolution to the network to make it better. These other chains, although possessing higher throughput and appearing to be more scalable today, haven’t withstood the tests of time or effort that Ethereum has dealt with. Ethereum is basically 10x bigger than every other network TVL wise. It’s also the only place where high value NFTs are CONSTANTLY being minted and sold. For an ETH killer to come in and dethrone all of that, it would have to have strong evidence that it can handle that much traffic and still outperform the L2 strategies that Ethereum currently possesses.
Needless to say, other chains will have a purpose, for the same reasons users use Sprint or TMobile instead of Verizon or ATT. There is a lot of traffic out there, and there will always be a lot of demand for different operations and user experiences.
So while everyone is claiming Ethereum is going to die because of gas fees, be the one that’s educated enough to know that gas fees thwart spamming, limit scammers and are a direct reflection of how much usage is actually on the network being settled on a consistent basis.
We can have a multichain world, but we don’t have any evidence of that world leading to the untimely demise of the Ethereum network, especially when sharding is finally introduced, which should, in theory, turn Ethereum into a blackhole that is able to consume everything around it and continue to expand rapidly without any repercussions.
But, until then, we will focus solely on rollups, competing L1s and the need to improve UXs for newcomers and utilize tokens as marketing devices to drive up TVLs and encourage the migration to the burbs.