Data analyst: Ethereum transaction fees will put a “hard cap” on DeFi bull run ๐จ This article is 4 years old...
Data analyst: Ethereum transaction fees will put a “hard cap” on DeFi bull run
2 min read
Updated: Aug. 14, 2020 at 9:02 am UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
Ethereum’s decentralized finance (DeFi) community and market have seen exponential growth over recent months. According to CryptoSlate sector data, all DeFi coins in circulation are now worth $12.78 billion in aggregate; this sum was closer to $3-4 billion just two months ago.
Acknowledging this upward trend, analysts have said that DeFi is at the start of a parabolic growth cycle.
As reported by CryptoSlate previously, Eric Conner, a prominent Ethereum proponent who works onย Gnosis, commented that upwards of $50 billion could flood into DeFi this market cycle:
โThe ghost chain reckoning is coming. There is well over $50bn in market cap value for chains no one uses. They will all be usurped by DeFi apps with actual use by the end of this market cycle.โ
The expectations of such growth were echoed by Andrew Kang, founder of Mechanism Capital. He said in a Twitter thread that multiple factors indicate that Ethereum’s DeFi space is only in the early innings of a much bigger game of growth.
Transaction fees, unfortunately, may act as a catalyst that caps the ongoing DeFi rally according to one prominent on-chain analyst.
Ethereum’s transaction fee debacle could put an end to the ongoing DeFi boom
According to Jacob Franek, a co-founder of blockchain data firm Coin Metrics, high Ethereum transaction fees could be a stop to the bull run.
Franek is responding to the record transaction fees currently being incurred by Ethereum users; ETH Gas Station reports that the cost of gas has reached 300 Gwei, 3,000 percent higher than this metric was at the start of the year.
On why these high fees could prevent DeFi from rallying too far to the upside, Franek commented:
“Gas prices will put a hard cap on this DeFi bull run. To be expected and probably a good thing… High gas likely new normal.”
Gas prices will put a hard cap on this DeFi bull run.
To be expected and probably a good thing.
Outstanding question is where will gas prices stabilize?
Migrating any significant amount of activity to L2 or new chains will take 6-18 months.
High gas likely new normal.
— Jacob Franek (@panekkkk) August 12, 2020
He is referencing how many users get crowded out, meaning they cannot invest or participate in certain Ethereum applications, due to the high transaction fees.
For context, 300 Gwei means simply sending ETH from address to address takes around $2.50 while sending a token costs $5.00. Small-scale DeFi users are also priced entirely out of the DeFi game at 300 Gwei as it costs $10 to trade on Uniswap, and $20+ to do anything notable on/with any of the top DeFi protocols.
“Not yet just saying it places a natural hard cap on how far this can run. Traders will only pay that much if theyโre perfoming significantly well,” Franek concluded in a reply to someone who commented on his opinion.
Multiple scaling solutions are on their way
While Franek and many others acknowledge the risks high transaction fees pose to the growth of Ethereum and its respective applications, there are solutions on their way.
Conner shared five such solutions in an Aug. 12 tweet:
We get it, gas fees are high. That's why people are working on:
-Eth2
-Optimistic Rollups (@optimismPBC, @fuellabs_, @StarkWareLtd, @zksync)
-Plasma (@omgnetworkhq)
-Payment channels (@statechannels, @ConnextNetwork)
-Sidechains (@xdaichain)I know I missed a lot of teams, sry!
— eric.eth (@econoar) August 13, 2020
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