Ethereum gas fees (transaction fees) have dropped significantly to their lowest since December 2020 because blockchain activity has reduced and the use of Ethereum layer 2 solution protocols such as Polygon (MATIC) has increased, according to blockchain data and analysts.
As of today, the average transaction fee on the Ethereum blockchain is $1.16, according to data from Ether Scan. This represents a 98% decline from mid-May when the transaction fees were above $60.
What are Gas fees?
Gas fees are the transaction fees that users pay to miners on a blockchain protocol to have their transaction included in the block. The system works on a standard supply and demand mechanism.
If there is more demand for transactions, miners can choose to include the transactions that pay more, compelling users to pay more to have their transactions processed quickly and efficiently.
High gas fees have been one of the biggest challenges for the Ethereum network when there was high network usage. Interest in decentralized finance (DeFi) has also been surging along with the price of Ether. The high gas fees forced DeFi investors to look to other networks such as the Binance Smart Chain network (BSC).
Why is the gas fee now low?
Since the market correction of May 19th, the cryptocurrency market has been in a state of a cooldown in which speculative investors are now taking a backseat to see how deep the market correction will be. Low gas fees mean minimal network congestion which ultimately is a natural response to the cryptocurrency market’s recent cooldown.
Congestion on the Ethereum blockchain has dropped with Ether’s price. Transactions on the network fell to around 1.1 million, down from May’s high at around 1.7 million. This is in line with Ether’s price which dropped from an All-Time High (ATH) of approximately $4,400 to trade currently at $2,220.
Another factor is the growing adoption of Ethereum layer 2 solutions such as Polygon. Analysts have seen a “significant amount” of users turning from Ethereum to Polygon. Many Ethereum-native DeFi protocols such as Aave, Kyber Network and SushiSwap have moved to the Polygon protocol recently.
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What they are saying
Ryan Watkins, a research analyst at Messari believes that the reduced gas fee is the result of a shift in the types of bots used by Ether and DeFi traders.
Traders had previously been using an auction called “Priority Gas Auction” (PGA) to bid up the gas fees to be the first in line for transactions. They have recently moved to “Flashbots” where miners and traders take their communication off the blockchain to private channels.
Vishal Shah, the founder of Alpha5 exchange, stated that lower gas fees “means network activity level is not as high. It also implies that there’s a lesser amount of speculative volume turning over.”
What this means
The price of Ethereum recently broke below the $2,000 trading zone but has quickly recovered due to speculation surrounding its London Hardfork Upgrade in July which was intended to help reduce the high gas fee plague, the network was facing before the market cooled off.
The hard fork upgrade will also prepare the network’s evolution to what is called Ethereum 2.0, a full transition from the proof-of-work (POW) consensus model to proof of stake (POS).
In the cryptocurrency market, coin prices tend to rally just before a major upgrade just like what we are seeing on the Ethereum network. It is expected that the price of Ether will continue to trend upward, towards the launch of the hard fork upgrade.
Investors are advised to use the dollar-cost averaging technique when buying into this project as cryptocurrencies are known to be highly volatile.
Ether is trading just above $2,200, up 10.63% at the time of writing this report.