Hey, crypto friends!
Ethereum, the powerhouse behind ETH—the second-largest cryptocurrency by market cap—has captured the attention of millions worldwide. In this article, we’re diving into why transactions on Ethereum can sometimes come with a hefty price tag. From the bustling network congestion to the mechanics of gas fees, we’ll break down the critical elements that influence transaction costs. Plus, we’ll explore the ongoing improvements aimed at making Ethereum more efficient and cost-effective.
Ready to discover why ETH transactions are expensive? Keep reading, and we’ll clear up all your questions!
Why are ETH transactions expensive?
In 2017, there was a significant increase in ICOs (Initial Coin Offerings), allowing the easy purchase and sale of new tokens via platforms like Ethereum. Over the years, the ICO market faced stricter regulations, requiring complicated KYC procedures and creating barriers to free trading. In response, decentralized exchanges (part of the DeFi movement) emerged, eliminating the need for rigorous verification processes and allowing for more direct and free trading.
Decentralized exchanges (DEXs) record all transactions directly on the blockchain. This large volume of transactions can overwhelm the network, leading to block congestion. When blocks are full, there isn’t enough space to process all transactions immediately, causing them to compete with each other to be confirmed first. This results in an increase in transaction fees, as users pay more to have their transactions prioritized.
Demand and Network Congestion
The cost of ETH transactions is largely driven by network congestion. As the premier platform for decentralized applications (dApps) like decentralized finance (DeFi) services, non-fungible tokens (NFTs), and a notable variety of smart contracts, Ethereum faces high user demand. This surge in activity often leads to network congestion, pushing up transaction fees as users vie for faster processing times by miners.
Gas Fees and Gas Limits
When you make a transaction on Ethereum, you pay a fee called ‘gas.’ This fee is paid to the miners, who are the people that process and validate the transactions. The amount of gas you pay depends on how complicated the transaction is and how many people are trying to make transactions at the same time.
For each transaction, you set a ‘gas limit,’ which is the maximum amount you are willing to pay, and a ‘gas price,’ which is how much you will pay for each unit of gas. When the network is very busy, especially during peak times, some people choose to pay more for gas so that their transactions are processed faster, which can cause costs to increase. Currently, the cost of transactions on the Ethereum network can exceed R$ 30 due to intensive data usage and processing.
Complex Smart Contract Interactions
Transactions that involve complex smart contracts, such as executing multiple decentralized exchange (DEX) trades or interacting with various DeFi protocols, require more computational power and, therefore, more eth gas. This additional complexity leads to higher costs.
Block Space Limitation
Each Ethereum block has a limit on the total amount of gas it can contain, limiting the number of transactions per block. When numerous transactions are sent simultaneously, this limit is quickly reached. Miners then prioritize transactions with higher gas fees.
Network Updates and Ethereum Improvement Proposals (EIPs)
Network Updates and Ethereum Improvement Proposals (EIPs) play a crucial role in enhancing Ethereum’s functionality. Recently, on May 8th, Vitalik Buterin brought a proposal, the EIP-7702, a significant update poised to transform the Ethereum network. This proposal aims to improve the network’s processing capacity, which may ease the congestion and lower transaction fees.
EIP-7702 introduces a feature that allows users to add smart contract code directly to their Externally Owned Accounts (EOAs) during transactions. This integration is particularly beneficial as it aligns with the existing Ethereum standard, EIP-4337, enhancing compatibility and efficiency. The exciting potential of EIP-7702 doesn’t stop with single transactions; it could lead to permanent enhancements in how Ethereum handles transactions, making it faster and more cost-effective for everyone.
Future Solutions and Improvements
Ethereum is taking steps to ensure that it continues to function well in the future. They are addressing future challenges such as quantum computing, which could change the way current technologies operate. Moreover, Ethereum is working to make its code simpler and safer. They are doing this by eliminating outdated parts that are no longer necessary and reducing the overall complexity of the system.
Another important improvement is the standardization of how data is compressed on the network. This makes it easier for users to share information efficiently. These changes will help Ethereum remain secure and user-friendly.
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