Ethereum Gas Fees at 6-Month Low as Market Cools, Layer 2 Solutions Ease Congestion

Ethereum transaction fees have dropped to their lowest since December because blockchain activity has cooled while use of Ethereum layer 2 solution protocols such as Polygon (MATIC) has heated, according to blockchain data and analysts.

As of June 27, the average transaction fee on the Ethereum blockchain was $4.42, according to data from Coin Metrics. That's down from fee levels above $60 as recently as mid-May.

Gas refers to the computational efforts required to execute specific operations on the Ethereum network. A fee, paid in ether, is required to successfully conduct a transaction on Ethereum. Ethereum is the second-biggest blockchain network after Bitcoin.

High gas fees have been one of the biggest challenges for Ethereum at a time of increasing network usage. Interest in decentralized finance (DeFi) has been surging along with the price of ether.

Analysts told CoinDesk that lower gas fees are a natural response to the crypto market's recent cooldown.

At press time, ether was trading around $2,103.77, less than half of the all-time high at $4,382.73 reached on May 11, according to CoinDesk 20 data.

Read more: Polygon Price Climbs to Record High, Benefiting From Ethereum Congestion

Congestion on the Ethereum blockchain has dropped with the cryptocurrency's price. Transactions on the network fell to around 1.1 million on June 27, down from May's high at around 1.7 million, according to Coin Metrics. Data from CoinGecko shows ether's trading volume on exchanges has also come down significantly.

The exchange data is in line with activity on decentralized exchanges (DEX). Data from Dune shows weekly DEX volume has dropped to below $20 billion for the week beginning June 21 from above $40 billion for the week beginning May 17.

Lower gas fees "means network activity level is not as high," Vishal Shah, founder of Alpha5 exchange, said. And because Ethereum is a foundation layer for a lot of DEXs, "it also implies that there's a lesser amount of speculative volume turning over."

At the same time, the growing adoption of Ethereum layer 2 solutions such as Polygon has also helped lower Ethereum gas fees, as CoinDesk reported recently. Analysts have seen a "significant amount" of users turning from Ethereum to Polygon; many Ethereum-native DeFi protocols such as Aave, Kyber Network and SushiSwap have moved to the protocol recently.

Another factor behind the reduced gas fees is the shift in the types of bots used by ether and DeFi traders, according to Ryan Watkins, a research analyst at Messari.

Traders had previously been using an auction called "Priority Gas Auction" (PGA) to bid up the gas fees in order to be the first in line for transactions. They have recently moved to Flashbots, where miners and traders take their communication off the blockchain to private channels.

The ordering of transactions on Ethereum is important, as CoinDesk's research associate Christine Kim wrote in her Valid Points newsletter on May 12. Especially for traders on DEXs, being milliseconds ahead of another trader can mean an opportunity to make thousands of dollars.

Read More: Valid Points: MEV on Eth 2.0: The Good, Bad and Ugly

The cumulative maximal extractable value (MEV), or the amount of money a miner on Ethereum stands to make as a direct result of their ability to insert, leave out and reorder transactions within a block, has declined since the beginning of June, remaining at a little above $700 million, according to Flashbots' MEV dashboard.

Flashbots, in short, "helped alleviate the unnecessary gas wars arbitrage bots were engaging in to front run each other," Watkins said.