Top VC Fears DeFi “Black Thursday” Redux Is Possible as Ethereum Congests

Ethereum has a transaction fee problem, similar to the one it and Bitcoin faced in 2017 and early 2018.

On August 12th, the cost of Ethereum “gas,” how transaction fees are calculated, hit 277 Gwei. By this writer’s estimates, that means that sending ETH was $2.25, sending ERC-20 was around $5, and trading on Uniswap was $10. That’s not ludicrous per se, but it’s a rate far higher than it was just three months ago.

Wow… seems that🍠is having quite the effect on Ethereum transaction fees.

"Fast" recommended gas price: 277 Gwei.

That's $2.25 to send ETH, ~$5 to send ERC-20s, $10 to trade on Uniswap, and more if you intend on doing more complex transactions. pic.twitter.com/kk6dhUItD9

— Nick Chong (@n1ckchong) August 12, 2020

With Ethereum seeing clear network congestion issues, investors have begun to speculate what effect this will have on the cryptocurrency market.

One venture capitalist/fund manager in the space has argued that the congestion increases the risk of another “Black Thursday” in DeFi. “Black Thursday” was the term given to the implosion that took place in the cryptocurrency market in March. While Bitcoin crashed massively, the entire DeFi ecosystem almost collapsed entirely due to congestion issues and extremely volatile price action.

Ethereum Could See Another “Black Thursday”: Multicoin Capital Partner

On “Black Thursday,” the DeFi ecosystem went through a harrowing crunch. As this chart from LongHash shows, there was a spike in liquidations of loans issued by MakerDAO, the flagship protocol of Ethereum’s DeFi ecosystem.

The liquidations were dangerous for DeFi as the loans were incorrectly processed due to congestion in the Ethereum blockchain. DeFi Pulse wrote on the matter:

“The dramatic increase in gas prices caused Maker’s price feed oracle to remain stuck at ~$166 despite the market dipping almost 15% lower at times.”

Tushar Jain, a managing partner of the DeFi-friendly Multicoin Capital, sees the ongoing Ethereum network congestion as a potential catalyst for another one of these events:

“Traders taking leveraged positions in Ethereum DeFi are risking not being able to reduce leverage in periods of volatility due to Ethereum congestion. ETH price has been driven by DeFi leverage, what happens when that leverage needs to unwind but can’t? Huge liquidations. If the chain is so congested that traders can’t easily reduce leverage, the keepers/liquidators will also have trouble bidding on liquidated collateral. Could be March 12th all over again.”

Traders taking leveraged positions in Ethereum DeFi are risking not being able to reduce leverage in periods of volatility due to Ethereum congestion.

ETH price has been driven by DeFi leverage, what happens when that leverage needs to unwind but can't? Huge liquidations.

— Tushar Jain (@TusharJain_) August 14, 2020

Solutions Are Coming Soon

While scalability is a problem in the short term, solutions are on their way. As reported by NewsBTC previously, Gnosis’ Eric Conner noted that there are five key scaling solutions currently in the works that show promise. They are as follows:

• Ethereum 2.0, the all-encompassing blockchain upgrade that will implement sharding and Proof of Stake (staking)
• Optimistic rollups
• Plasma
• Payment channels
• Sidechains

We get it, gas fees are high. That's why people are working on:

-Eth2
-Optimistic Rollups (@optimismPBC, @fuellabs_, @StarkWareLtd, @zksync)
-Plasma (@omgnetworkhq)
-Payment channels (@statechannels, @ConnextNetwork)
-Sidechains (@xdaichain)

I know I missed a lot of teams, sry!

— eric.eth (@econoar) August 13, 2020

The implementation of these solutions will ease the potential for another “Black Thursday” as the network would be able to process transactions quicker and for cheaper.

Photo by Alexander Popov on Unsplash
Price tags: ethusd, ethbtc
Charts from TradingVIew.com
Top VC Fears DeFi "Black Thursday" Redux Is Possible as Ethereum Congests