DeFi’s Exponential Growth Is Crippling ETH, ERC-20 Transactions On Ethereum: Report


If you followed the Ethereum network over the past year or so, one clear trend that emerged on the blockchain is decentralized finance (DeFi) products hit an all-time high in the value stored, crossing the billion-dollar mark earlier in February. However, the growth of DeFi transactions seems to be affecting the rest of the chain’s transactions, according to a research by Covalent, an Ethereum analysis company.

DeFi growth cannibalizing ETH use as money

In a published report labeled “The Flippening Series” by Covalent’s co-founder, Ganesh Swami, the growth of complex ETH transactions such as DeFi is increasingly taking up block space on Ethereum at the expense of native ETH and ERC-20 token transactions.

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DeFi gas costs comparison with ETH and ERC-20 transfers: Source – @Covalent_HQ

By using the gas fees data over time, Covalent was able to map out the share of block space each of the categories takes up on the blockchain since 2016. In what Swami described as a “cap on the block space of Ethereum” the growth in one type of transaction will take up space in another. He states,

“In an ideal scalable world, all types of transactions have room to grow. But on Ethereum today, for one kind of transaction to grow, it has to cannibalize the others.”

Over 30% of ETH transactions are from complex smart contracts

Looking at the chart below, early 2016 represented one of the highest block space for ERC 20 token transfers and complex smart contract transfers representing about 50% block space for the both of them. However, over the cause of the year, complex txs fell to about only 5% of the total transactions as ETH and ERC 20 tokens regained ground due to the growth of Initial coin offerings (ICO).

Relative share of gas fees for each transactional category on Ethereum

Scalability issues: DeFi is slowly cannibalizing ETH and ERC 20 block space on Ethereum – Source: @Covalent_HQ

As the DeFi space grew with platforms such as Maker and Synthentix, which offer loan products, gaining adoption, complex transactions started eating into the block space of the ERC 20 and ETH transactions. Currently, the total complex transactions take up about 30% to 35% of the total block space as the native ETH transactions dropped to over 99% in late 2015 to about 75%-80% of the total transactions.

ICOs fell through 2017, from highs of 20% in January to account for about 10%-15% of the total block space through the year. Currently, these ERC 20 token transfers only account for less than 5% of the total Ethereum blockchain activity.

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