A recent spike in transaction fees on Ethereum and Bitcoin appears to have reignited the debate around solutions for scalability and the role of layer 2s.
At the moment, these cryptocurrencies are showing gas fees that are considerably high. For high-priority transactions on Ethereum, gas fees have reached as high as $220, while Bitcoin fees are currently around $10 for high-priority transactions. Interestingly, the recent Bitcoin fees are relatively low compared to the fees over the last three months, which have hovered around $1. This current fee spike is the highest since May.
This surge in fees has driven users to platforms such as Solana, which boasts significantly lower transaction fees in comparison. For example, Solana only charges $55-60 per minute for all Solana users. This is in stark contrast to the median gas fee on Ethereum, which spiked to 160+ gwei, charging each poor Ethereum user as high as US$60 fees per transaction.
Another top performer when it comes to transaction fees is PulseChain, which claims to be 4,000X cheaper than Ethereum and 14,000X cheaper than Bitcoin. With fees on Ethereum and Bitcoin rising, this difference in cost has seen many users explore alternative solutions.
The price of network fees is dynamic and is a product of demand or how congested the network is. An increase in on-chain activity often occurs in bull markets or when market sentiment is strong, but an added side effect is the impact on lower-income users. This has raised questions about how these high fees impact the unbanked and lower income populations, as the cost of conducting transactions on these networks continues to rise.
Prior to the spike, transaction costs on Ethereum averaged out at $11.35 on Nov. 8, according to BitInfoCharts. A few weeks earlier on Oct. 14 it fell as low as $1.40 — the lowest level recorded in 2023. However, gas fee on Ethereum peaked at $196 on May 1, 2022, while fees were consistently above $20 between August 2021 and February 2022.
In the meantime, developers of Bitcoin and Ethereum have put a priority on decentralization and security, opting to use layer 2s to make transactions cheaper. The Lightning Network is used to scale Bitcoin, while Ethereum has a handful of layer 2s specifically focused on making Ethereum faster and cheaper, such as Arbitrum, Optimism, and Polygon. Transactions on these layer 2 networks are often less than $1, but not everyone agrees that this is the right way to tackle scalability.
Justin Bons, founder of cryptocurrency investment firm Cyber Capital, believes the base layer should be the only transaction environment, and is critical of the use of layer 2s, describing them as “parasitical”. He advocates for monolithic blockchain architectures in which consensus, data availability, and the transaction execution are all handled on the base layer, with Solana as an example of this.
The feasibility and scalability of monolithic blockchains is being debated, with some critics pointing to several outages on Solana due to network congestion. They argue that a modular blockchain design, which offloads some transactions to a second layer, is a better approach to solve scalability. The Ethereum and Bitcoin model, having a modular layer two design, is seen as the better solution by some.
While developing blockchain technology further could mitigate the current issue, a long-term scalable solution is needed to address the increasing fees on Ethereum and Bitcoin. And as the debate around the best approach to tackling scalability rages on, alternative blockchains and layer 2 solutions are likely to continue to gain attention.