Defi Boom Fueling ETH Gas Fees, Threatens Viability of Smart Contracts

Growing Ethereum network transaction fees, which touched new highs recently, are a direct consequence of the increasing number of defi projects and yield farming. Yield farmers need to pay ETH for transactions like moving funds in and out of pools. The increased number of yield farmers leads to more transactions and slower confirmations making higher fees inevitable.

Such high fees are now threatening the viability of some smart contracts and decentralized finance (defi) applications.

According to a newsletter produced by Boxmining, the defi boom, like the ICO bubble of 2017, has helped to spark competition between different protocols. The newsletter singles out one project, Sushiswap, which is only about one week old, yet it is believed to be behind “the spike in average transaction fees on September 1, 2020.” As of September 2, the average transaction fee on the network was USD$15.13.

Sushiswap, which is “a fork from Uniswap” already had “$1.2 billion on funds under lock” after just five days. In addition, it is already “hugely popular in China where it is dubbed ‘Uniswap’s biggest rival.’” It is this kind of rivalry between different Defi protocols that is causing a “gas war.”

In the meantime, the higher fees might be good news to ether miners still, they are raising concerns “about the sustainability of the network.” As the newsletter goes on to suggest that “many are saying that the high transaction fees mean that they are ‘priced out’ of activities on defi platforms.”

The newsletter opines that higher fees “may even mean that some smart contracts become virtually unusable, thereby bringing the question of Ethereum being a smart contract platform in the first place into question.”

Already, some organizations have been forced to suspend transactions as they wait for the gas fees to return to normal levels. For instance, on September 1, Publish0x, a platform that tips its contributing writers with ETH based tokens, announced the “payouts delay due to extremely high ETH gas fees.”

The publisher explains how the fees have grown and how this is affecting business:

“When we first started Publish0x, gas prices were 6 gwei. It cost us $10-20 to pay out 2000 people. Today gas prices hit an all-time high of over 460 gwei, nearly 100x the cost. We’re looking at $2,000+ cost for a payout at current gas prices. This is obviously not economically viable.”

Just like others similarly affected, Publish0x says it is open to the possibility of using non-ETH based tokens for tipping in the future.

Meanwhile, the Boxmining newsletter suggests that the “answer to this can be Ethereum 2.0, but its mainnet launch is months away.”

In his recent comments about the levels of gas fees, Vitalik Buterin suggests the second layer solution will overcome the high fee challenge.

What are your thoughts about the impact of Defi projects on ETH gas fees? Tell us what you think in the comments section below.

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