Despite a marked slow-down from the start of the year, Ethereum (ETH) is once again facing a gas crisis. A variety of factors have combined to result in high transaction prices and slowed transaction processing. During the crypto-boom at the end of 2017, Bitcoin and Ethereum both suffered from network congestion due to scalability issues and lagging computational resources – but this eased as the industry entered a bear market.
Gas is an integral part of the Ethereum blockchain, providing a numerical value for the computer power needed to run a smart contract. The price of gas is highly variable, depending on the demand for power and the supply of miners willing to perform the actions. When the market is booming, or a decentralized application is consuming too many resources, the entire blockchain can slow – often suspending transactions as they run out of gas.
Transactional Friction and Causes
All transactions, cryptocurrency and fiat, have a measured amount of friction associated with them. It’s a factor of the cost to process the transaction and incidentals incurred throughout. While friction is relatively low for in-person fiat transfer in the modern age, credit cards and banks often still charge to process out-of-bank transfers. The cost of gas within the Ethereum blockchain determines the level of transactional friction.
Some notable projects have significantly taxed Ethereum’s chain. The first was crypto-collectible phenomena, CryptoKitties. The ERC721 non-fungible token standard variant used by the site suddenly exploded in popularity, and the demand for computational power rose alongside. As this happened right at the peak of the crypto-bubble, Ethereum users suddenly faced prolonged transfer times and exorbitant Gas fees.
The most recent crisis seems to be caused by China’s FCoin exchange. The exchange offers a full refund for transaction fees in the form of their own, native cryptocurrency – causing a deluge of trade volume in order to secure the exchange’s coin.
Alongside Bitcoin’s Lightning Network, Ethereum has their own off-chain scaling software. Titled the Raiden Network, this software uses a series of ‘channels’ between users to validate and finalize transactions. So long as the channel is still open, no funds are confirmed on the chain itself, saving previous network resources. While not fully implemented, Raiden may be critically necessary soon if gas prices remain an issue.
Ultimately, Ethereum intends to switch to a Proof of Stake (PoS) model that would alleviate this issue. As the blockchain would no longer require miners to crunch transactions to add blocks to the chain, the price for each transaction would theoretically decrease. However, the shift to PoS is still distant, and other solutions will be needed in the interim.
Article By: Adam Stone