Ethereum’s Scale is Preventing More DeFi Adoption and Usage
With the advent of Ethereum, and then subsequently the DeFi industry, adoption became a much hotter topic as the newly created tokens promised all of the possibilities and financial freedom without banks and institutions to control them.
And now, as we’ve entered into the second half of 2020, there seems to be too much adoption in the DeFi space, an unexpected and unwanted problem that’s been putting a strain on the entire ecosystem.
With most of the DeFi ecosystem based on the Ethereum network, the cost of operating any of the thousands of dApps and protocols depends on the cost of transacting on the Ethereum network.
However, it turns out that the influx of dApps and users to DeFi has pushed Ethereum’s transaction fees through the roof. Data from Etherscan showed that, on Jun. 11, a total of 15,374 ETH was paid in transaction fees on the Ethereum network.
The same day, the average gas price on the network reached its three-year all-time-high, with an average gas price recorded on that day being around 709 gwei. This is a 1,816% increase from the day before, when the average gas price was around 37 gwei.
According to ETHGasStation, the standard gas price on the Ethereum network currently stands at around 37 gwei, which equals roughly $0.179 per transfer.
The cost of transfer should not be confused with the cost of doing complex operations on the network like interacting with chained smart contracts which attract very high fees. For example, yield farming involves complex interactions with the smart contracts and the fees are quite high compared to just the transfer cost.
A lot of the spikes can be attributed to the yield farming mania in DeFi space which promised incredibly high returns on staking. A lot of people rushed into yield farming after it spread on Twitter that people could make 200% interest per year while lending on DeFi apps like curve.
With the smart contract ETH fees cost of $10 just to start yield farming, the system excludes a lot of small players who would like to lend or start by lending small amounts like $100. Because they will have to wait for months or even an year just to recover the ETH gas fees which make the whole offer less exciting.
Readers much note that such smart contracts are a risky business. They involve a lot of smart contract and liquidation risks and the returns are short-lived.
Crypto Twitter has been ablaze with numerous complaints from DeFi users, with hundreds of people claiming they paid fees as high as $50.
This is a direct consequence of a huge spike in interest from new users. TheGraph, a decentralized protocol for building dApps on Ethereum, experienced significant service degradation on Jun. 24, a problem that impacted many DeFi applications which were using the protocol as its front-end. Throughout the morning, 500 errors were reported, with several other errors popping up throughout the day.
The company said that the crash was a result of a significant growth in query volume—the day of the crash saw over 45 million queries, a sharp rise from the usual 25 million. And it wasn’t just simple transactions that clogged the network—the Graph noted in its postmortem that they began receiving “especially complex” queries that contributed additional strain to their already thinly-stretched database.
“This is largely due to the recent growth in adoption of DeFi applications; including product launches, liquidity mining programs, and crypto price appreciation,” the company said.
While a huge influx of new users might seem like something any network would welcome with open arms, this presents a significant problem for Ethereum which has seen its fair share of controversy surrounding its scalability. The fact that the network can, in theory, breed hundreds of thousands of dApps and facilitate the development of decentralized finance proved to be hard to execute in reality.
Crypto Twitter and the rest of the internet are filled with numerous complaints coming both from Ethereum’s critics and its most avid users—none of the promises the network makes are worth anything if it can’t handle more users.
This could have a detrimental effect on the future of DeFi. As more people flock to Ethereum, the slower and more expensive to use the network will become. While it might take some time, this will ultimately turn people away from Ethereum and turn them towards a competitor blockchain.
This doesn’t mean that Ethereum has signed its death sentence, though. The network’s sheer presence and potential market reach will certainly push developers to deliver Ethereum 2.0. We could also see a second-layer solution such as the Lightning Network on Bitcoin created on Ethereum if ETH 2.0 fails to deliver in time.