In Part 1, I delved into a general overview of how Avalanche works and how the Avalanche Foundation and Ava Labs have been deploying their treasury tokens and capital to build the ecosystem. Before I release Avalanche Part 2, I’m publishing my thoughts on Ethereum, specifically on gas fees. In Avalanche Part 2, I’ll be using this article to lay out Avalanche’s long-term advantage.
Ethereum is the dominant Layer 1 for DeFi. Today, the protocol has a $500B+ market cap and holds $170B+ in TVL with 24 projects with >$1B in TVL. On developer and user metrics, it has over 2,800 DApps, 90k+ daily active users, and over 175M unique addresses. The numbers clearly show that Ethereum is the center of gravity for crypto.
However, Ethereum has a problem: gas fees. Gas fees have grown hand-in-hand with the explosion of DeFi. The cost of transacting on Ethereum is eye popping. If a crypto user wants to transact on UniSwap, one of the largest Ethereum automated market maker, the average gas is over $85. Purchasing an NFT on OpenSea will cost a collector over $200 on top of the actual NFT’s value; if an NFT drop is hotly anticipated, expect to pay even more. Additionally, transactions can also fail on occasion but a user still has to pay the gas fee for the attempt.
Gas fees are so high because the demand for recording on-chain transactions continues to increase steadily. There are too many transactions on Ethereum while the chain is choked by its 15 transactions per second limit. As a result, the market clearing gas fee to compensate miners keeps moving up. After all, if you won’t pay it, someone else will because they are moving enough size to amortize the cost. If you’re moving a small amount, expect to play around with price slippage and gas parameters and hope the transaction goes through at night.
Gas fees do serve a crucial function though; it is a critical component of achieving consensus. Any crypto user, regardless of use case (DeFi trader, NFT collector, yield farmer, etc.), has to pay gas fees to complete any interaction in the crypto world. It’s similar to using a credit card in the real world: a necessary tax to compensate the transaction processors (Mastercard / Visa for TradFi and validators / miners in crypto) to record the transaction. As a result, having a low transaction fee, i.e. gas, is paramount for crypto to grow and eventually go mainstream.
Today, gas fees on Ethereum are the first manifestation of anti-network effects. The current success of Ethereum is the exact reason why the protocol is choking. Every new incremental user makes Ethereum’s experience worse.
There are a couple projects and initiatives that are actively trying to overcome the problem. There are Layer 2 scaling solutions for Ethereum (Optimism, Arbitrum, Zk) and attempts to improve Layer 1 with data sharding and Ethereum 2.0 (i.e. proof-of-stake). All of them are interesting solutions on their own and even better combined. However, rollups are still in the early innings, working out their kinks (persistent double digit gas fees, seven-day withdrawal periods, EVM compatibility, liquidity fragmentation, etc.), and mainnet upgrades require the Ethereum Foundation to ship code that impacts the whole Ethereum chain. Regardless of the solutions, Ethereum-focused teams need time to execute, iterate, and improve. Time is ticking and users are looking elsewhere.
The crypto world is actively seeking an immediate solution to transact cheaply while processing as many transactions as possible in the shortest amount of time. Other Layer 1 protocols have taken notice and counter positioned against Ethereum’s weaknesses. For example, Solana and Avalanche both have taken off recently because of their superior gas fees and TPS. These are just two chains amongst the dozens actively seeking to supplant Ethereum. As long as high gas fees and slow transaction processing persist on Ethereum, a multi-chain future seems likely. Thus, I expect fierce competition ahead for Layer 1 dominance and positioning.
Thank you for reading about my Ethereum gripes! This article sets up the foundations for Avalanche Part 2, which will be coming out soon.
Disclaimer: I hold positions in Solana and Avalanche, both mentioned in this article. I hold both cryptocurrencies as long positions and to explore their respective ecosystems. This is not investment advice.