Ethereum gas fees: Too low or too high? No one can decide

Critics who have a problem with volatile gas prices — on Ethereum or elsewhere — have the wrong vision for the future of crypto.

Much of the historical debate around Ethereum (ETH) has been around whether its gas fees are too high. This year, its fees have become exceedingly low, in part thanks to rollups — except during the Aug. 4-5 crash, when they were disproportionately elevated. So which is it?

The surprising answer is that everything worked as intended. Periodic spikes are how you’d expect a wholesale market to behave during peak demand. Those who point to these developments as problematic have the wrong vision for the future of crypto.

Backing up, the modular scaling philosophy is based on the idea that blockchain’s aren’t networks that process activity, they are the purveyors of a scarce asset called secure block space. Like any other scarce asset (such as land, oil or electricity), secure block space is continuously auctioned off to the highest bidder, and the winner is whoever needs it most. This will likely be either a whale or a wholesale buyer, such as a layer-2.

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Monolithic chains have more of a network philosophy: they want to serve everyone on an equal footing. This is untenable because blockchains aren’t just networks in the way the internet is a network. If a video stream or email are delayed then it’s not that big of a deal. But if an important financial transaction is delayed, it could be catastrophic. Blockchains are predictable and secure transfer and settlement layers. In every other context where such a service is provided, both the service and the cost are tiered.

Imagine if the post office charged the same for a second-class post card as it did an overnight package — it couldn’t possibly work because everyone would opt for the latter, even for non-priority parcels. Pricing supply to always be below demand means you have to constantly add capacity to prevent fees from climbing ever higher.

But on a modular chain it doesn’t matter as much. Individual users still trading on L1 are there because they want max security. That only makes sense if they are doing large transactions. A trading firm doing a $5 million swap doesn’t care if gas goes to 500 gwei. It barely impacts their bottom line.

The other players on such an L1 are wholesale providers like rollups. These players also don’t care as much about short term spikes in base layer fees. They have a healthy profit margin when activity is normal and fees are low. This creates a cushion for them to operate at a loss during spikes. 

This is how every other market for scarce assets works. Airlines and gas stations are wholesale buyers of oil products. When oil prices are low, they have a bigger profit margin. When oil prices spike, they absorb most of it, possibly operating at a loss. If high prices persist, then they slowly raise their own. The important thing is that retail customers (flight passengers, car drivers, etc.) are one layer removed.

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The caveat to all of this in crypto is that, during the Aug. 4-5 crash, rollup gas fees also spiked. If my theory held true, that would not have happened. But that’s because the rollup fee market is very immature. In time, competition will force L2s to compete on price. Not just on the absolute level, but also in volatility. Some will even advertise themselves on this promise. When that happens, sequencers will squirrel away some of their profits during the good times to absorb shocks during the bad.

I’m confident that most gas fees will eventually be abstracted away from end-users, particularly retail ones. We already see this for some things like USD Coin (USDC) transactions on Base. Part of the appeal of launching your own L2 is the ability to treat gas costs/sequencing as a loss leader. The same will happen with dApps. (An example is UniswapX eating a portion of gas fees due to MEV) and even wallet providers. This UX development could still happen on a monolithic chain, but is more stable on a modular one.

Omid Malekan is a guest columnist for Cointelegraph, an adjunct professor at Columbia Business School and the author of Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.