Ethereum's Double-Edged Sword: Will a Rising Price Hurt Users?

The value of ethereum's ether token has jumped by about 900% since the start of the year, but there is a downside to that success.

AccessTimeIconMay 10, 2017 at 10:00 a.m. UTC
Updated Dec 11, 2022 at 1:51 p.m. UTC

Ethereum supporters have every reason to be elated.

Not only has the value of the platform's ether tokens jumped by about 900% since the start of the year, but the public blockchain has recently attracted attention from banks and tech behemoths. And while ethereum supporters have long argued that the global computing platform would help to form a new kind of internet, a wave of innovators are now trying to deliver on that ideal.

The problem is that there might be downsides to this increase in price and increase in attention. Namely, as the price increases, ethereum apps grow more expensive to use.

That's because on ethereum, users need to pay directly for the computational power they use, whether to place a bid on a prediction market or use new kinds of decentralized Twitters and Ubers. For now, this is a different picture than, say, Facebook, the popularity of which rests in part on its 'free' platform.

Matus Lestan, co-founder of the ethereum app Ethlance, for example, recently posted a screenshot of a user looking to create a user profile on the platform – an action that cost 0.08 ETH, or $7. It would have cost "little more than $1" when ether was at $10, he wrote.

Given this increase, Luis Cuende, project lead at decentralized startup Aragon, told CoinDesk:

"[I]t's very understandable that some users may be pissed off."

The price of gas

Still, many ethereum apps, including Aragon, are in the test stage right now. So, it's unclear how many apps and users are actually impacted by this increase.

It might be more of a harbinger of future friction. Augur co-founder Joey Krug, for instance, said that users of his ethereum-based platform aren't being impacted.

"Since Augur is currently still in beta on testnet [the higher prices haven't] affected us directly yet," he said. "However, once it's live, it will indeed."

Adding to the complexity, though, is that the prices are more dynamic than simply being affected by the cryptocurrency's increase in value.

The details are a bit thorny. First off, it's worth noting that 'gas', 'gas price' and 'gas cost' all mean different things. (Even ethereum's inventor has mixed up the terms.)

'Gas' describes units of computational power in ethereum, while 'gas cost' is used to denote how much gas is required to perform an action on the platform. A simple transaction costs 500 gas, while storing data using ethereum costs 100 gas.

These numbers are hardcoded into the software. Finally, the 'gas price' is how much each unit of gas costs in ether.

The total cost of an action on ethereum is the gas cost multiplied by the gas price. If the gas price stays the same while the value of ether increases, as has been the case so far, then the overall price of smart contracts increases.

In ethereum, miners set these gas prices. "Miners are the ones calling the shots," Jason Teutsch, founder of scalability project TrueBit Foundation, told CoinDesk.

Miner pressure

Some expect that miners will lower the gas prices. Their incentive to do so, one argument goes, is that if they don't, less people will use the network and pay transaction fees. So far, though, this hasn't happened.

The gas price sometimes fluctuates, according to a chart from ethereum data site Etherscan, but has stayed at roughly the 22 to 23 Gwei range (0.000000000000000022 ETH or less than 1 cent) for the past year.

"It's a bit of mystery to me why this quantity remains so stable. Perhaps it's an artifact of mining pool policies, but it might also reflect some average fixed cost perceived by miners," Teutsch said.

So, the situation could be mitigated if miners pushed down fees. Indeed, some users are currently campaigning mining pools to push down the gas prices.

Adding to the confusion, as Krug pointed out, is that users can post transactions with a fee that's less than this hardcoded price. Transactions might not go through as quickly, but he pointed out that, even at about one-twentieth of the current price, "it's really not much slower". The problem is that most users are simply going along with the hardcoded price.

Given this, there might be less reason to worry about an increase in prices just yet. Because blocks aren't full, in fact many of them are empty, users aren't fighting to get their transactions into a block with increased fees (as with bitcoin).

"Gas prices aren't going down, but blocks aren't being filled either, it's a lose-lose all around," Krug said.

"A large amount of this is due to developer failure to act," he said, arguing that developers should introduce a more dynamic gas price that is dependent, in part, on how full blocks are.

Longer term, there are other limitations to public blockchain technologies as they stand today. For example, there's a limit on the amount of computational power per block on ethereum. This limit is roughly equivalent to bitcoin's block size, although ethereum miners, again, can increase or decrease it.

Wouldn't it be simple to just reduce the gas prices while also increasing the amount of gas that fits into a block? Well, there are trade-offs: increasing the gas limit increases the burden of running an ethereum full node.

Dealing with these trade-offs is a problem bitcoin has also faced. And is, in a sense, a big element of its block size debate is centered on the community arguing about growing transaction fees.

In other words, a lower gas limit is required for ethereum to remain decentralized. But that could lead to higher smart contract prices in the long term, as more people use the platform.

Towards solutions?

In that way, you could think of these price increases as a symptom of blockchain tech's larger scalability problems, of which there are a range of projects that might help.

One such project is TrueBit, which pushes ethereum smart contract computation verification, such as more advanced computations like machine learning, to a new layer above the blockchain.

"TrueBit is immune to some of these problems," Teutsch said, arguing that the platform can help with transaction throughput, as well as facilitate more advanced ethereum computations.

What does that mean in this situation? The idea is that then you don't have to settle as many computations directly on the blockchain. You'll still have to pay fees to the computers in the TrueBit market, but the idea is that you will rarely have to pay the more expensive fees required to settle a transaction on-chain.

Gilles Fedak, co-founder of distributed cloud computing app, noted that although their applications are already primarily off-chain, the team behind the computing platform is looking to another off-chain network, Raiden, to help with some of their problems.

In another direction, Cuende said that Aragon's business model might be an inspiration for other decentralized apps. The startup plans to pay transaction fees on the platform, shielding users from the increasing prices.

Still, all of these projects are works in progress. And until they come to fruition, or miners adopt new fee structures, ethereum smart contract fees could climb. Which is a little ironic, considering Buterin once suggested that bitcoin's transaction fees are too high.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Etherscan.

Sword image via Shutterstock


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