Ethereum is the second most popular cryptocurrency after Bitcoin, so comparisons between the two are only natural. Nevertheless, they’re far from the same. Ethereum follows in the footsteps of Bitcoin but has bigger aspirations, supporting not only cryptocurrencies but also decentralized applications. It’s difficult, if not impossible, to say which is better since Bitcoin and Ethereum serve different purposes. If you’re interested in investing, do your due diligence and understand all the aspects.
In order to send and receive Ethereum, you must pay a transaction fee. The fees are called gas fees because they keep the network running. The cryptocurrency exchange you use most likely has fees of its own, so there’s no getting around the fee structure. Gas fees are high due to the popularity of Ethereum. The space is limited per block.
Daily transaction fees are divided by the number of transactions made on the Ethereum network. The fees are typically based on the 3-day trading volume, and they’re paid every time someone performs an action on the blockchain. The network transaction fee per day is currently 1,719 ETH, roughly $2.8 million. The recent decline in gas fees is the result of low network activity and the rise of Layer 2 scaling solutions.
The Growth in The Number of Ethereum Users Didn’t Drive Network Utilization
With the rise in popularity of Ethereum, many people are becoming interested in this form of investing and money-making. Those involved in the cryptocurrency space take an interest in Ethereum, as highlighted by the growth in its user base and the demand for block space. Still, this hasn’t driven network utilization. Reduced activity around decentralized finance has led to low gas fees, not to mention less network congestion.
The main drivers of network activity are long-term technology utility, intermediate-term ecosystem growth, and short-term market prices. These forces are activated in different timeframes and evolve differently as time passes. Ethereum daily transaction fees have fallen to the lowest single-day total since December 2021. Following the launch of Friend.tech a few days ago has expedited a reduction in Layer 1 fees because the platform relies on Coinbase’s Layer 2 chain, Base.
Lower gas fees make Ethereum transactions more affordable, so users don’t have to dig deep into their pockets to trade cryptocurrency. Meaningful applications with real-world use cases are built on the Ethereum blockchain so users can continue to take advantage of the network. The system is now readily available to small businesses and people who were previously left out due to high gas costs. All transactions undergo processing easily and swiftly.
The Growth in Importance of Layer 2 Solutions in The Ethereum Ecosystem
Layer 2 solutions refer to networks or technologies that run on top of the Ethereum primary ledger. Simply put, they’re solutions that help scale the blockchain by handling transactions off the Ethereum Mainnet while leveraging its robust decentralized security model. Examples include but aren’t limited to rollups and state channels. Since Ethereum is one of the most popular blockchains in the world, it struggles with low transaction speeds and costly fees.
All Layer 2 solutions aim to make Ethereum faster and more affordable; they rely on the same processes, but there are differences (e.g., technical) in how they scale the network. For example, Optimism uses single-round fraud proofs, while Arbitrum uses multi-round fraud proofs. On the other hand, Polygon acts as a sidechain, relieving congestion by connecting to the Ethereum network and allowing users to process transactions on it.
Given the wide adoption of Layer 2 networks, the future of the Ethereum blockchain looks promising. Layer 2 solutions enable more transactions to be processed without compromising the security of the main chain, therefore, creating a path for long-term growth. Layer 1 blockchains like Ethereum can enhance their transaction throughput without altering their construction, so the Mainnet is spared of the computational-heavy validation work.
As mentioned earlier, Friend.tech uses Coinbase’s Layer 2 chain, Base, that provides a safe, low-cost, developer-friendly way to build on-chain. The Base Mainnet functions as a separate network from Optimism, but developers have agreed to share the network’s transaction fees with Optimism Collective. Base doesn’t have its own dedicated network token, so it’s conditioned by Coinbase’s support; there’s no token incentive for locking assets on Base.
Could The Latest Trend Signal Growing Trust in Centralized Exchanges?
A centralized exchange is operated by a single entity, which acts as an intermediary between buyers and sellers. They’re the most common means investors use to buy and sell Ethereum; they trust the exchange to handle their assets. The bankruptcy of the once-mighty cryptocurrency exchange FTX and the resignation of its billionaire founder, Sam Bankman-Fried, have been hard to overcome. The lack of appropriate due diligence has some investors worried.
Perhaps Ethereum’s on-chain activity has declined because users exhibit higher levels of trust in centralized exchanges. Trust is a key ingredient for all cryptocurrency market interactions, so positive and negative interactions can affect the behavior of former trading partners. Regulation can play an important part in advancing trust in cryptocurrency exchanges, providing transparency and protecting the integrity of the ecosystem. Although a critical element, regulatory compliance isn’t enough, so it’s necessary to implement robust cybersecurity programs, adequate key/wallet management, and eliminate weak due diligence procedures.
The amount of Ethereum staked is twice the amount held on centralized exchanges, but it’s not reflected in asset prices. Even if it’s forecasted that Ethereum’s value will increase, the price remains below $2000. Ethereum is trading at $1,646.60. It’s possible that Cardano will one day be worth as much as Ethereum. Since its inception, Cardano has been rooted in innovation and is committed to on-chain governance.
Wrapping It Up
To conclude, the transfer fees on the Ethereum blockchain have dropped to 1,719 tokens, providing insights into users’ interaction on the chain. Indeed, Ethereum total fees haven’t been high throughout the past months, yet the metric has continued to drop in value. The lack of activity on the Ethereum network could signal a lack of interest among investors. Let’s not forget that Bitcoin, too, has taken a sizable hit recently.