What are Ethereum gas fees, and why do they matter for traders?
Ethereum gas fees are the expenses charged by the Ethereum network for carrying out transactions or executing contracts. Gas fees are a way to incentivize Ethereum miners to include transactions in blocks and to ensure that trades are executed quickly and accurately. The higher the gas fee, the more incentive a miner has to include a transaction in their block.
Gas fees are also affected by the overall demand on the Ethereum network. When there is high demand, gas fees will generally be higher as miners prioritize transactions with higher fees. Therefore, gas is an essential consideration for traders as it can affect the overall cost of a trade, and there are a few different ways that you can identify when gas fees are low.
To understand gas (GEWI) fluctuations, we need to look at network demand. Traders compete between them to find a miner’s processing spots. During periods of high network activity, bids go higher as there is more competition, resulting in failed network transactions.
As demand for increased Ethereum usage affects the price of gas, let’s look at what causes Ethereum prices to spike.
DeFi the first spike in ETH fees
Smart contract usability has grown exponentially, leading to impressive growth in the number of Ethereum dApps. There are over 3,000 running dApps, most of which are DeFi applications. Transactions on Ethereum DeFi dApps take place on the network, and during periods of increased market volatility, more users transfer funds, leading to a spike in gas prices.
2020s DeFi Summer was the first instance of DeFi usability. However, most network issues appeared during 2021, as new users entered the market, increasing the network load. This is also reflected in data that shows the average Ethereum gas prices increased by 500% in the last five years.
The NFT Boom
Ethereum NFTs have become a more prominent catalyst for higher Ethereum transaction fees, causing a gas war. This is because every NFT mint requires users to pay for gas to acquire their NFT (a unique proof of ownership of a digital asset).
In late 2021 NFTs have become a new industry trend. As developers and artists have been selling out NFT rarity collections, there has been a significant demand for both NFTs and network activity. To have the highest bid and not be overthrown by other traders, NFT users would overbid on the gas price.
An Ethereum gas price chart can indicate popular NFT minting collections. For example, a Bored Ape Yacht Club LAND mint caused Ethereum gas prices to reach as high as $6,000. However, the first Ethereum gas fee spike occurred on January 7, 2019, and was caused by the launch of the CryptoKitties game on the Ethereum network, which later congested the entire network.
OpenSea is one of the most used Ethereum platforms for NFTs, registering over $5 billion in total sales in the January of 2022. As NFT adoption entered a new stage in January, traders paid a whopping 387 million in Gas fees.
High NFT sales periods are cyclical, and often, the market cools down when other industry sectors get the trader’s attention.
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What will ETH 2.0 bring?
The Ethereum network has several shortcomings. It’s not scalable, has a low transaction output of 15 transactions for seconds, and it’s expensive. In response, protocol developers are in the midst of network migration.
Ethereum 2.0 will add sharding, improving the network’s ability to scale and process more transactions. Additionally, it will shift the consensus model from PoW to PoS, which will decrease pressure on Ethereum miners – removing them altogether, meaning gas fees on Ethereum will be substantially lower. Finally, an updated Ethereum will be able to process up to 100,000 TPS; however, this is yet to be proven.
The network’s shortcomings have pushed traders and developers to seek more scalable and affordable smart contract alternatives. This is reflected in Ethereum’s TVL on DeFi, which has decreased from 96% at the start of 2021 to 58.86% by May 2022. This shows that other Layer 1 and Layer 2 protocols have successfully chipped away at Ethereum DeFi share.
Protocols such as Polygon provide users with the same level of security as Ethereum while building a network Sidechain that processes transactions faster and at a lower cost. Binance Smart Chain (BSC) is a Layer 1 competitor that has successfully mirrored Ethereum’s network implementations while using Proof of Authority (PoA), a hybrid consensus mechanism. BSC has become a locus for developing GameFi applications due to its low latency and high output. Finally, Solana has proven it can accommodate users’ demands in terms of network usability. While their DeFi TVL is significantly lower, Solana has proven to be an ideal network for NFT growth.
When are Ethereum gas fees lowest?
Ethereum gas fees are lowest when there is less activity and demand for Ethereum products in the market. After a significant volatility spike in Bitcoin, the demand for Ethereum and other blockchain-based applications dropped significantly. If there is no supply, there is no demand for Ethereum miners’ activities.
Historically, data shows that Ethereum gas fees are lowest between 1 and 3 am UTC, and peaks between 2 and PM UTC, as time frames account for US and EU network activities.
There are a few different ways to identify when gas fees are low. One way is to use a gas tracker like Etherscan. This website provides real-time information on gas prices and can be used to identify when fees are low.
You can also track gas prices with tools like DeFi Pulse. This platform provides information on a range of DeFi protocols and tracks the overall gas prices on the Ethereum network.
Pinpointing the exact time for low Ethereum gas fees is not about luck. Instead, analyze existing data and find moments of market inactivity to pay the lowest gas fees. Avoid periods of NFT mining or high market volatility as gas prices can skyrocket!
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Reviewed and Fact Checked by Eugene Abungana , Investment Analyst, Financial Analyst, and Institutional Trader