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Why Are Ethereum Fees so High

Why Are Ethereum Fees so High

In the wild world of Ethereum gas fees, we’ve seen large swings in price over the last couple of years. A migration to other blockchain based networks has begun to occur as a result of these price swings, leaving many retail investors unable to participate in the network. While Ethereum fees have skyrocketed over this timeframe, the network has continued to work on reducing these costs to continue to attract widespread adoption of the protocol. In this article, we dive into the basic dynamics that make up Ethereum fees and distill the reasons in which these prices have swung massively as of late. 

Supply and Demand 

Ethereum fees are represented by prices, like every other economic good. All prices obey the laws of supply and demand, with no exceptions. If demand for a good increases when supply is kept constant, prices rise. When demand falls and supply stays constant, prices fall. Tru-isms like the former and latter are Economics 101.

A changing price is the shifting ratio of the current supply vs the current demand. This ratio is always in some sort of flux even if it’s not very noticeable. Prices move and adjust because supply and demand move and adjust, and vice versa. Transaction fees on a public blockchain like Ethereum act no differently.

Why are fees on Ethereum “expensive” relative to other public chains? Like any other market, people are willing to pay for something if they believe they will derive some marginal utility from it. Said another way, in their own economic calculus, it makes sense to pay the fee. Under this logic, higher fees imply there is higher priced economic activity on Ethereum compared to other chains, which justifies these “expensive” transactions. 

What’s being supplied? Who’s demanding this?

The “supply” we’re talking about today is usually referred to as “Block Space” which offers users transaction processing and settlement. Miners sell block-space – usually to the highest bidders – and earn ETH by doing so. Users of Ethereum can earn a spot within a block by paying an appropriate fee. 

The price of the fee needed to get in the next block depends on how many users are competing for inclusion, as well as the economic value those particular users are trying to transact with. Most users don’t pay $25-200 fees for small transactions. Users on Ethereum, whether they be individuals or collectives, are usually making medium to large, time-sensitive financial transactions that often justify those fees. The transactions could be for swaps, arbitrage, adding collateral, paying down debt, buying an on-chain option, and pretty much anything else that can be done in traditional financial markets. 

If you’d like to see “who” is paying all these fees, you can see this on Eth Gas Station, though not as a list of individual’s names. You’ll see a top 25 leaderboard of the top “gas guzzlers” in Ethereum. The gas-guzzlers change depending on what’s happening on the network, but there are some regulars like Uniswap that facilitate a massive amount of token swaps and regularly eat up a non-trivial amount of block space. 

Cheaper Blockchains?!

In any economic system and engineering effort there are tradeoffs and costs. No matter the activity, there is a cost imposed and a tradeoff being balanced. There is no “free lunch” and you probably can’t have it all. A “cheaper” or a lower fee doesn’t automatically imply you’re getting the same service for a better fee. Some blockchains might have much more current capacity than others but they may be making a tradeoff in some other area such as security or reliability to achieve that greater capacity. Or it could be cheaper because there are very limited economic opportunities to exploit. As soon as the economic opportunities do emerge, chances are that the once “cheap” chain gets very expensive very quickly. 

It’s easy to yell at Ethereum for being relatively expensive, but that’s what happens when a resource is limited, has high demand, and provides utility to its users. Prices go up. Other systems will feel these same pains when demand pushes up against the innate constraints inherent in any system. 

Blockchains are fundamentally constrained – like any architecture – by tradeoffs. For the foreseeable future fees on active chains won’t be dirt cheap and will act more and more as a settlement layer for layer two networks. Layer one chains like Ethereum and Bitcoin will be the anchors of many different networks and organizations and over time will probably only settle very large transactions for relatively high fees. On the other hand, layer two networks will be optimized to do the bulk of low to medium value transactions in the future.

While there isn’t a hard definition of which wallet is the best ether wallet, especially as it relates to calculating ethereum gas fees, Edge users can rest assured that we use industry best practices such as sourcing real-time data from tools like Eth Gas Station and optimizing the appropriate fee based on the amount of ETH being sent. These practices help to ensure accurate fee calculations for users, reducing sunk cost when participating on the network. 

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