DeFi ramps up Ethereum transaction fees to 2018 highs: report

A “State of the Network” report published today by crypto data firm Coin Metrics found that the sudden surge in demand for decentralized financedecentralized finance (or DeFi) products continues to hike up the price of EthereumEthereum transaction fees. But in some ways, found Coin Metrics, this might actually be a good thing.

Transaction fees are those charged by the Ethereum network each time a transaction is executed. Now, average Ethereum fees are nearing $0.4, the highest since the middle of 2018, according to Coin Metrics. 

The silver lining? High transaction fees “typically signify high demand for block space, and create more revenue for the miners securing the network,” wrote the firm in its report. 

Coin Metrics pinned the heightened demand down to the booming DeFiDeFi market. DeFi refers to non-custodial financial services, such as lending protocols or decentralized stablecoins. Most of the top DeFi protocols live on Ethereum. It’s now a $3 billion industry. And it’s growing very quickly; just two weeks ago, total locked value across DeFi protocols only stood at $2 billion.

As supporting evidence, Coin Metrics pointed to how much ETH was being transferred each day—in most of July, over 1 million ETH ($243,700,000) was transferred each day, it found, which is far more than normal. 

In addition, even though a Cloudflare outage on July 17 crashed some popular cryptocurrency wallets, Ethereum transaction fees were up by 30.3% in the past week, according to the Coin Metrics report, suggesting increased demand. 

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The meteoric rise of new Ethereum platforms such as Compound and Uniswap have put decentralized finance use cases (or DeFi) front and center in the crypto landscape in 2020. A new report by Codefi, a subsidiary of the Ethereum software development firm ConsenSys, shines a light on how many unique users are leveraging these and other DeFi services. Even as the value locked in DeFi applications has nearly tripled from April of this year, the report concludes, most of the DeFi activity isn't coming...

And while BitcoinBitcoin transactions fell by 5%, Ethereum transactions rose by 5.5%. All thanks to “the continued rapid growth of decentralized finance (DeFi) applications.”

But make no mistake: high transaction fees aren’t exactly good news. They make the network “prohibitively expensive” to use, said Coin Metrics.

Vitalik Buterin, co-founder of Ethereum, tweeted today that high fees also make the network less secure. Buterin cited a Princeton paper that explained how high transaction fees create “wealthy” blocks that are “attractive” targets for selfish miners to loot.

Coin Metrics said that high transaction fees hit dapps like gaming and collectibles the hardest since they “depend on large amounts of low cost transactions.”

And Ethereum’s high transaction fees suggests that the network isn’t equipped to handle lots of activity, limiting the scope of the network. 

Over the past few months, Ethereum’s network utilization has hovered at around 95%. Should it hit 100%, then the network would grind to a halt and become incredibly expensive to use—and useless for dapps that rely on it for micropayments. 

Ethereum approaches technical limits as transactions soar

Ethereum is getting dangerously close to hitting its technical limits, as users of the blockchain network climb a mountain that has been scaled just once before. Decentralized finance and its associated tokens are on fire, and the number of transactions on the Ethereum network is drawing close to marking a new all-time high. The transactions record was set early on in 2018 at the height of the ICOcraze, before falling to an average of less than half the peak for the next two years, before steady...

And DeFi isn’t the only thing that can raise transaction fees. Large scale Ponzi schemes can push the network to its limits, for instance. 

Currently, one such Ponzi, Forsage, is responsible for 6.44% of the total number of transactions on Ethereum over the last 1,500 blocks. The Philippines' Securities and Exchange Commission has warned investors not to use it. 

A few weeks ago, Forsage was responsible for around 20% of the total transactions. By comparison, a contract for liquidity protocol Uniswap V2—one of the most popular DeFi dapps on Ethereum—took up just 5.06% of transactions.