DeFi Effect: Scaling Debate Begins as Ethereum Fees Reach Two-Year Highs

Ethereum has seen a decentralized finance craze over recent weeks.

Due to innovation, high returns on investments, and other attractive characteristics, DeFi has gone parabolic.

Data from DeFiPulse shows that the value of cryptocurrency locked in blockchain finance applications has reached $1.6 billion. This is

Simultaneously, DeFi-related tokens like Compound’s COMP and Balancer’s BAL have rocketed in value. There was a point earlier this week when COMP was up 1,000% from last week’s launch price of ~$30.

But this craze has come at a cost: high Ethereum transaction fees. Really high transaction fees.

And this cost is starting to get on some users’ nerves.

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Ethereum Fees Spike on DeFi Craze

The DeFi craze has had quite an effect on Ethereum’s usage and adoption.

As reported by NewsBTC, blockchain analytics firm Santiment has found that Ethereum’s network growth is reaching yearly highs. The firm specifically cited the number of new BTC addresses being created, which “just crossed above 100,000 again yesterday.”

“Ethereum’s network growth metric has rapidly been on the rise since the beginning of 2020, creating 237% more addresses yesterday than it did on Jan 1, 2020 (and ~+200% accounting for rolling averages now vs. then).”

This strong on-chain usage has coincided with a spike in fees.

EthGasStation reported on Wednesday that the cost of gas on Ethereum reached ~50 Gwei.

That coincides with around $0.25 for a simple transfer of ETH. Though at 50 Gwei, it costs though dozens of dollars for interactions with smart contracts.

As Head of Business Development at Kraken’s futures division wrote on the fees:

“I have spent $14 on ETH gas fees to transfer/lock my $15 into @CurveFinance and I’m earning a princely $0.079 in weekly $SNX rewards. I’ll break even in just 177 short weeks! (not including gas to close contracts.”

My yield farming is off to a great start.

I have spent $14 on ETH gas fees to transfer/lock my $15 into @CurveFinance and I'm earning a princely $0.079 in weekly $SNX rewards.

I'll break even in just 177 short weeks! (not including gas to close contracts) 🚀🌕

— Kevin Beardsley (@kevinhbeardsley) June 25, 2020

Transaction fees are so high that Coin Metrics data shows that the median fee on Ethereum has reached a nearly two-year high.

Not Good for Adoption

These highs fees aren’t good for adoption.

They crowd out the retail user from leveraging some of the best applications Ethereum has to offer. If using an attractive application costs $10 each time and the user has $200 in ETH, what’s the point?

The topic of scaling has once again entered the fray in response to this trend. Joseph Todaro of BlockTown Capital wrote:

“If fees move higher or even maintain this level, I expect $ETH competitors focused on scalability to see increased attention.”

Sasha Fleyshman, a trader at crypto fund Arca, recently wrote that “scaling [is] necessary for growth — this is a stress test.”

There are a few solutions coming down the pike.

The most notable of these being Ethereum 2.0, which will revamp the way in which the entire blockchain works. It is expected to reduce transaction times while also increasing output to hundreds, maybe thousands of transactions per second.

Related Reading: Trader Who Predicted Bitcoin’s 2019 Bottom Says This Is Next

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DeFi Effect: Scaling Debate Begins as Ethereum Fees Reach Two-Year Highs