DeFi Outgrowing Ethereum, Time for DeFi Mania to Move On to Other Layer 1 Solutions?

“Ethereum gas fees are breaking the market structure of DeFi,” noted Tushar Jain of MulticoinCap as the second largest network becomes unusable for small users, “suffering from anti-network effects.”

For the last two days, the average fees in USD on the Ethereum network have been at a new all-time high of about $23.8. Today, it has fallen to $21.7.

This resulted in a whopping $60 million paid in ETH tx during the past 48 hours. On Friday, Ethereum miners earned $3.5M in a single hour, the highest hourly revenue to date, as per Glassnode.

As we reported before, while the fees have been yet again hitting a new high in USD terms, the same is not the case in terms of ETH. At the current rate of 0.015 ETH, the average gas fee is nowhere closer to the Sep. high of nearly 0.032, as per Blockchair.

The same is the case for average gas prices, which went over 250 Gwei but is still far off from DeFi peak high of about 550 Gwie, more than 700 Gwei in June 2020, and over 800 gwei in Dec. 2016.

As the price of Ether and DeFi tokens take a drop, the average gas price has also come down to 195 Gwei.

Breaking DeFi’s Market Structure

Gas prices on the Ethereum network are not the only headache for decentralized finance (DeFi) users as DeFi projects charge more fees on top of the Ether network fees.

Tushar Jain, the managing partner at MulticoinCap, noted how sending some ETH can cost a small player about $10. While trading on popular decentralized exchange (DEX) Uniswap is costing about $100 in gas, another DEX Balancer can cost $150 in gas fees with an additional fee of the DEX itself.

And if one doesn’t choose to go with high gas fees, they can get front run by other traders. “DeFi has outgrown Ethereum,” he said.

Even the billionaire owner of Dallas Maverick, Mark Cuban, who is also invested in AAVE and SUSHI, complained about the high fees on DeFi. Jain said,

“Arb bots can't even keep the prices in line between Uniswap, Sushiswap & Balancer right now! There are hundreds of bps of arbs right now. All because the gas fees are too high for these arbitrages to be profitable. Ethereum gas fees are breaking the market structure of DeFi.”

The Big Adoption Moment is Now!

Crazy high fees are the result of high activity and clear sign sustained activity in spite of high gas, all of which shows great demand for Ethereum; it is also becoming unusable for many users, especially the smaller ones.

“Ethereum is suffering from anti-network effects,” which means new users are reducing the utility of a platform for existing users, said Jain.

This, according to him, can have bad implications for the Ethereum network. Jain expects more than 50% of DeFi activity to be off of Ethereum by the end of this year. From here, it could move to Layer 2 solutions, which are “just a gateway drug to move to another layer 1,” he said.

While Ethereum has launched the first phase of ETH 2.0 that allows people to deposit their ETH in contract, 2.9 million Ether are already locked in for staking; the full-on transition can take years.

“ETH 2.0 will take too long to ship. DeFi is having its big adoption moment now, and the best solution is the one which works today,” Jain added: “Do you think new users will wait years for ETH 2.0 or just go to another platform?”

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