The Ethereum Scaling War Effort – The Daily Gwei #32

Everyone knows that gas fees on Ethereum have been consistently high over the last few months due mostly to the explosion of Tether (USDT) on Ethereum, DeFi apps and of course, the ponzis/scams clogging up the network. So the question I want to answer today is, are high gas fees good for Ethereum?

I strongly believe that high gas fees are extremely healthy of the Ethereum network. This may be an unpopular opinion but bear with me as I explain why throughout this piece.

The first reason – it encourages the adoption of scaling/throughput technologies like layer 2 and sidechains (as I’ve written about here). One of my all time favorite pieces is ‘The Myth of the Infrastructure Phase’ by Dani Grant and Nick Grossman of USV. In this piece, they explain that core infrastructure tends to only get deployed and improved upon once the demand exceeds supply. In the context of Ethereum, this means that while gas fees were low (block space supply was high), there wasn’t any real need to deploy scaling infrastructure but now that gas fees are very high (block space is scarce) it’s forcing the ecosystem to deploy and improve upon the infrastructure (via layer 2). To take directly from the piece – “First, apps inspire infrastructure. Then that infrastructure enables new apps.”

The second reason – high fees are an ecosystem-wide issue and it affects every single project (some more than others) so it gives the entire Ethereum ecosystem a “common goal” to work towards. This is really powerful because most of the projects in this space have built up good relationships with each-other over the years and are very ingrained/aligned with the Ethereum community. They all want to work together and push Ethereum scaling forward in order to keep the “competition” at bay – this is what I like to call “The Ethereum Scaling War Effort”.

The third reason – it shows that there is incredible demand to use the Ethereum network (with plenty of apps finding product/market fit). All types of transactions and interactions are happening on the network literally around the clock – it never stops because the Ethereum network never goes offline. This shows developers wanting to build new products that Ethereum is the platform to build on because it has the most powerful network affect across a number of different factors – users, liquidity, integrations, infrastructure etc. Liquidity is a huge moat that Ethereum has because, as I’ve written about before, liquidity begets liquidity which makes this network effect incredibly hard to compete with.

The fourth reason – the high fees are being paid to miners which increases the overall security of the Ethereum network. In fact, fees paid on Ethereum have been higher than those paid on Bitcoin for about 45 days straight now and its showing no signs of slowing down. This also bodes well for sometime in the future when (if?) EIP-1559 is implemented – it’d theoretically result in lots of ETH being burnt. If you want to learn more about this, read my previous piece here.

Ultimately, I see that developers have two paths they can take; stay on Ethereum and work with the solutions available or migrate to another more “scalable” competitor chain. The first option allows developers to retain all of the network effects that Ethereum has (users, liquidity, integrations, infrastructure etc) whereas the second option requires them to wait for those network effects to be built out. The second option also carries the risk that the chain that they migrate to never really gets any adoption and so their project fails (or migrates to the hyper-competitive Ethereum space).

I think high gas fees over the long-term (say ~2 years) without any relief would definitely hurt Ethereum and cause other smart contract blockchains to actually gain some ground. Though, I don’t expect gas fees to stay high for that long – at least, not for the end-user. With projects rapidly working to deploy layer 2 solutions, I believe that high fees for end-users will be a thing of the past in a couple of years.

This is the Ethereum scaling war effort.

Have a great day everyone,
Anthony Sassano

All information presented above is for educational purposes only and should not be taken as investment advice.

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