High gas fees have been identified as the biggest problem in DeFi, threatening to undermine the accessibility and security that blockchain technology promises.
As DeFi transactions surge, the cost of doing business is skyrocketing, with gas fees devouring profits and pricing out smaller investors.
This article discusses the root causes of this issue and explores potential solutions to alleviate the burden of high gas fees in DeFi transactions.
What are Gas Fees?
Gas fees are payments made by users to compensate for the computing energy required to process transactions and execute smart contracts on a blockchain, primarily on Ethereum, the most popular blockchain for DeFi applications. Measured in gwei (a denomination of Ether), these fees ensure that the network remains secure and functional by rewarding miners for their work.
Why are Gas Fees High?
The following are some reasons why gas fees are high:
Network Congestion
As DeFi platforms gain popularity, the number of transactions increases, leading to network congestion. When too many transactions compete for limited space in a block, users must bid higher gas fees to prioritize their transactions.
Complex Smart Contracts
DeFi transactions often involve complex smart contracts requiring more computational power to execute. This complexity increases the amount of gas needed.
Ether Price Fluctuations
Since gas fees are denominated in gwei but paid in Ether, the overall cost in fiat currency terms can vary with the price of Ether. When Ether’s price rises, so do the effective costs of gas fees.
Impact of High Gas Fees on DeFi
Here are some of the impacts of high gas fees on DeFi:
Accessibility
High gas fees create a barrier to entry for small investors. When transaction costs are too high, participating in DeFi activities, such as trading, lending, or staking, becomes uneconomical unless the transaction size is large enough to justify the expense.
Innovation
Due to high gas fees, developers face challenges in creating efficient and user-friendly DeFi applications. The need to optimize smart contracts for gas efficiency can limit innovation and complicate development processes.
Market Dynamics
High gas fees can lead to market inefficiencies. For example, arbitrage opportunities might go unexploited because the potential profits are outweighed by transaction costs, leading to less effective price discovery and market operation.
Strategies to Mitigate High Transaction Costs in DeFi Transactions
Here are various strategies that can be employed to reduce transaction costs in DeFi.
Layer 2 Scaling Solutions
Layer 2 solutions are designed to handle transactions off the main Ethereum blockchain (Layer 1), reducing congestion and lowering fees. Here are some prominent Layer 2 solutions:
Optimistic Rollups
Optimistic Rollups assume transactions are valid and only perform computations if fraud-proof is submitted. This approach reduces the computational load and, consequently, the gas fees. Projects like Optimism and Arbitrum are notable examples of implementing this technology.
ZK-Rollups
ZK-Rollups use zero-knowledge proofs to validate transactions off-chain and post only a summary on-chain. This method ensures security while drastically reducing the data processed on the main chain. zkSync and StarkWare are leading implementations of ZK-Rollups.
State Channels
State channels allow users to conduct multiple transactions off-chain and only settle the net result on-chain. This approach benefits applications requiring frequent interactions, such as gaming or microtransactions. By reducing the number of on-chain transactions, state channels help lower overall gas fees.
Sidechains
Sidechains are independent blockchains that run parallel to the Ethereum main chain. They use their consensus mechanisms and security protocols, reducing the load on the leading network. Users can transfer assets between the main chain and sidechain, benefiting from lower fees and faster transactions on the sidechain. Polygon (formerly Matic) is a popular example of a sidechain solution.
Ethereum 2.0 Upgrades
Ethereum 2.0 aims to improve scalability and reduce fees through significant upgrades to the network’s architecture.
Proof of Stake (PoS)
The transition from Proof of Work (PoW) to Proof of Stake (PoS) in Ethereum 2.0 is expected to reduce the need for energy-intensive mining and increase transaction efficiency. Validators in PoS are selected based on the number of tokens they hold and stake, which is more efficient than PoW’s competitive mining process.
Sharding
Sharding divides the Ethereum network into smaller pieces called shards, each capable of processing its transactions and smart contracts. This parallel processing increases the network’s capacity, reducing congestion and gas fees.
Utilizing Alternative Blockchains
DeFi projects increasingly leverage alternative blockchains that offer lower fees and higher transaction throughput.
Binance Smart Chain (BSC)
BSC is compatible with Ethereum’s ecosystem and provides lower transaction costs and faster processing times. Many DeFi projects have migrated or launched on BSC to maximize its cost efficiency.
Solana
Solana offers high throughput and low fees, making it suitable for high-frequency trading and complex DeFi operations. Its unique consensus mechanism, Proof of History (PoH), allows for rapid transaction processing.
Avalanche
Avalanche is designed for scalability and speed, with significantly lower fees than Ethereum. Its consensus protocol allows quick finality and high transaction throughput, making it an attractive alternative for DeFi applications.
Smart Contract Optimization
Optimizing smart contracts can significantly reduce gas fees by minimizing the computational resources required.
Efficient Coding Practices
Developers can write lean and efficient code to reduce the gas consumption of smart contracts. Avoiding unnecessary computations, reusing code, and optimizing data storage are some practices that can help.
Batch Processing
Batch processing involves grouping multiple transactions into a single batch, reducing the total number of transactions processed on-chain. This approach is helpful for operations like airdrops or token transfers to multiple recipients.
Gas Token Usage
Gas tokens like Chi and GST2 allow users to “store” gas when prices are low and “spend” it when prices are high. Users can reduce their overall transaction costs by using gas price fluctuations.
Gas Fee Estimation Tools
Gas fee estimation tools can help users time their transactions during periods of lower network activity, reducing costs. Tools like Etherscan’s Gas Tracker, Gas Now, and similar services provide real-time gas fee estimates and historical data, enabling users to plan their transactions strategically.
Community and Governance Solutions
DeFi projects often have decentralized governance structures that allow token holders to propose and vote on changes, including fee structures. Community-driven initiatives can lead to more equitable fee models and innovative solutions to cost concerns.
Fee Subsidies and Incentives
Some projects may introduce fee subsidies or user incentives funded by the community treasury or ecosystem funds. These subsidies can help offset transaction costs and encourage user participation.
Dynamic Fee Structures
Dynamic fee structures that adjust based on network activity can help balance demand and supply, keeping fees more stable and predictable.
Conclusion
High gas fees remain a significant hurdle for the broader adoption and usability of DeFi. However, the industry is actively addressing these challenges through innovative Layer 2 solutions, the evolution of Ethereum 2.0, the use of alternative blockchains, and ongoing optimization efforts.
As these solutions mature and are widely adopted, the promise of accessible, efficient, and decentralized financial services becomes more achievable.