The high transaction fee of Ethereum will swallow up the inclusive vision of DeFi, what should we do?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Author: Pan Zhixiong, Lianwen Research Director, published with authorization.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Author: Pan Zhixiong, Lianwen Research Director, published with authorization.
Many people classify "decentralized finance" (DeFi) as part of "open finance" (Open Finance), and believe that its ultimate goal is to achieve a permissionless and inclusive financial infrastructure. However, as the Ethereum blockchain currently carrying the most abundant DeFi ecology, it has built a high cost of use for ordinary users. Of course, this is caused by many reasons.
Taking the current DeFi mortgage lending project Compound as an example, the recent average cost of a single transaction is close to $2. What is even more ruthless is the liquidity aggregator such as 1inch. Due to the embedded transaction routing and other logic, the average cost per transaction has exceeded $5.
This also means that the scenario of small exchange or small mortgage loan is very uneconomical. For example, for a transaction of about $100, close to 5% of the cost must be handed over to miners. However, in the scenario of large-value transactions, although the proportion of transaction costs on the chain is lower, it has to bear more transaction slippage.
Therefore, for Ethereum's DeFi protocol, there is a "soft limit" on the scale of funds-although the DeFi protocol itself is open and does not restrict users from using it, if the amount of funds is small or large, a large proportion of capital needs to be paid high additional costs.
It is unlikely that most users will pay a few dollars to pay, exchange or deposit a dollar. We made a simple calculation based on the current actual on-chain transaction costs: If you want to play with most of the DeFi protocols, it is more appropriate for the amount of funds in a single transaction to be "hundreds" to "tens of thousands of dollars". Within the scope of such funds, the proportion of transaction costs can be less than 1%.
The reason for the sudden increase in transaction costs on the chain comes from several aspects. Last month, Lianwen took stock of the culprits who recently occupied Ethereum resources. Among the top 7 projects, 5 were suspected to be "capital disks." In addition, the demand for transfers of the US dollar stablecoin USDT is also increasing, coupled with the continuous increase of DeFi projects to seize the computing resources of Ethereum, resulting in the continuous high transaction fees on the chain for more than a month.
According to the statistics of Etherscan, the average daily gas cost has reached about 40 Gwei in recent days, while the average gas cost in the early days was only about 10 Gwei, and even 1 Gwei can be traded - look, this is already several times to dozens of times difference!
The most straightforward solution is to increase the block size, even if there are some negative effects. In recent days, miners have reached a consensus to expand the block size of Ethereum by 20%, resulting in a reduction of about 20% in handling fees. The effect is very obvious. However, the core developers of Ethereum believe that this measure may bring greater risks to the network, not only increasing the capacity and time for miners to synchronize nodes, but also causing DoS (denial of service attacks).
Therefore, in addition to the form of direct block expansion, developers and the entire community are still exploring other ways to "lighten" the computing resources on the chain. There are already many levels of solutions that are expected to gradually alleviate this problem:
The plan that is expected to be fully rolled out within the year: Based on the current status of Ethereum, the second-layer expansion plan (such as Rollup) can increase the throughput by about two orders of magnitude.
A plan that is expected to be realized within two years: When Ethereum is fully upgraded to 2.0, sharding technology, a new consensus algorithm, and better-performing infrastructure can increase the throughput of the main chain.
Short-term solution: The EIP-1559 improvement proposal may reduce transaction costs in the short term, especially for transactions that can solve transaction fees due to hand slipping, as Vitalik Buterin once expressed.
In addition, other public chains are also around the corner, trying to erode more user scenarios of Ethereum, although this can also relieve a lot of pressure on the chain of Ethereum:
TRON: Some USDT liquidity has been migrated from Ethereum. For USDT transfers between many exchanges, some users have started to use TRON. In addition, the developer community is still trying to learn from Ethereum’s DeFi applications. For example, the “Tron version” of Uniswap and Synthetix has been released.
Bitcoin sidechain Liquid: Liquid not only supports large, low-cost, anonymous transfers of USDT, but also begins to try token issuance business, such as the platform currency of the cryptocurrency exchange BTSE.
Others: There are also many public chains that have increased compatibility with the Ethereum Virtual Machine (EVM), such as Ethereum Classic (ETC), NEAR, Binance Smart Chain, Polkadot, etc. In the future, developers may migrate DeFi applications. Priority is given to public chains that support EVM, because transplantation is less difficult.
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Do the math: How much capital is suitable for Ethereum DeFi?
There is no doubt that the cost of the "micropayment" user scenario is too high if it is implemented by Ethereum. Taking the stable currency DAI as an example, the simplest transfer needs about 0.7 US dollars based on the current handling fee - if you just transfer or pay a few DAI, the handling fee cost is too high.
What percentage of transaction costs is acceptable to users? You can refer to a few data first:
The single transaction cost of cryptocurrency exchanges is about 0.1% of the order amount, or even lower;
Alipay credit card repayment fee is 0.1%.
to pay
Let’s make a simple assumption that the cost of a single transaction is less than 1% of the total amount, which is still acceptable to users psychologically.
So according to the current main scenarios of DeFi: payment, transaction/exchange, and lending, let's calculate how much capital is suitable for the current DeFi project.
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to pay
The Gas consumption of USDT is about 56,000, and the cost of a single transaction is 0.5 USD;
The Gas consumption of DAI is about 72,000, and the cost of a single transaction is 0.7 USD;
The Gas consumption of USDC is about 43,000, and the cost of a single transaction is 0.4 USD.
If the assumption of "1% cost is acceptable" is taken as the premise, then in DeFi application scenarios such as "micropayment", the minimum amount of each transaction is about 40 to 70 US dollars.
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transaction / exchange
Since Ethereum carries the circulation of many tokens or assets, there is naturally a demand for exchange or transaction, which is also one of the most important scenarios of DeFi at present.
This article selects 4 typical decentralized trading protocols as references, namely:
Universal Exchange Protocol Uniswap
Aggregated Exchange Protocol 1inch
Decentralized exchange IDEX for pending orders
On the whole, if a transaction protocol needs to meet the premise of "acceptable 1% cost", the lower limit of the amount of funds depends on the "transaction cost on the chain", and the upper limit of the amount of funds depends on "liquidity", that is, "transaction loss ” or “Slippage”. However, since each of the above-mentioned products has its particularity, some different assumptions will be added when evaluating its "1% cost".
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Curve: $1 million to $1 million
In order to provide multiple types of asset exchanges, Curve has created multiple independent fund pools. Taking the current sUSD fund pool with the best liquidity as an example, after counting the on-chain data from June to the present, it is found that the average cost of Curve’s on-chain transactions exceeds $1.Click hereSo for Curve users, the amount of funds between $1 million and $1 million is more appropriate.
Lianwen Note: If you want to know more about Curve's product details and dramatic hacking incidents, you can
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Learn more.
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Uniswap: $60 to $40,000
Uniswap is a trading protocol on the Ethereum platform. Except that the trading volume has been surpassed by Curve in recent days, it has been the leading platform in terms of trading volume for a while.
If you take ETH/DAI, the most liquid fund pool, as an example, the cost of a single transaction is about 60,000 Gas, which is nearly 0.6 US dollars.
On the other hand, based on the current capital volume, the exchange of 40,000 DAI for the corresponding amount of ETH will generate a slippage of about 1%.
Therefore, for Uniswap users, a fund size of US$60 to US$40,000 is more appropriate (applicable to ETH assets only), and for other smaller tokens, it may be far less than US$40,000.
1inch: $500 to "the sum of other DEX liquidity"
1inch is a trading protocol that aggregates liquidity. It aggregates the liquidity of various trading protocols in one platform, and then selects and optimizes the best trading path for users to reduce transaction losses for users.
After counting the data on the chain from June to the present, it is found that due to the complex logic of smart contracts and the need to include multiple transaction sources, the average cost of transactions on the chain exceeds $5, which means $500 It is the lower limit of transactions that users can accept.
IDEX is the decentralized exchange (DEX) closest to the centralized exchange experience, because it is based on the pending order book, and users can issue limit orders for transactions. Another feature is that IDEX supports more currencies.
borrow money
After performing processes such as deposit, transaction, and withdrawal, the total transaction cost exceeds $3. And because it is a pending order book model, which is different from the above three exchange products, it is possible to conduct large-value transactions by submitting limit orders. This also means that $300 is the lower limit of the amount of user funds using IDEX, otherwise the cost ratio will be higher than 1%.
However, in order to meet compliance requirements, IDEX added KYC requirements last year. Users need to submit their names and email addresses to obtain a daily withdrawal limit of US$5,000. If they exceed this limit, they need to submit ID cards and other conventional KYC requirements. Information, this can be regarded as an implicit restriction.
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borrow money
The lending platform is also an important business in the current DeFi field. Users can pledge one asset, lend another asset or choose not to lend. Specific application scenarios may be increasing leverage, arbitrage, etc. The most important projects in the lending space are Compound, Aave, and dForce, among others.
In addition, for low-risk users, the purpose of depositing Compound is to obtain interest income. At present, only USDT’s deposit income has reached an annualized rate of more than 10%, other assets such as DAI are around 1%, and ETH is even worse, only 0.01%.
What are the solutions?
This means that if the user deposits 400 DAI, it will consume 2 USD in transaction fees, earn about 4 USD in revenue after one year, and consume 2 USD in transaction fees to withdraw funds, and the user will not have any income within a year.
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What are the solutions?
The developers of Ethereum and the friends of the public chain are all worried about the scalability of Ethereum. Tron is the most direct, not only by migrating the liquidity of USDT, but also quietly laying out the DeFi protocol, trying to move the successful projects of Ethereum to a brand new platform.
Of course, the optimization of the Ethereum protocol itself has been continuing, and there are already many levels of improvement plans, which are expected to be implemented from this year to optimize the performance of Ethereum, reduce transaction costs, and make better preparations for open finance.
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The second-tier expansion plan that is expected to be fully rolled out within this year
Already live: Loopring, DeversiFi
If the performance of the main chain cannot be improved in the short term, the performance of Ethereum can be increased by compressing transaction data and uploading batches to the chain through cryptography techniques. This is the basic design principle of the two-layer network (Layer 2). In addition to the outdated star Plasma, Rollup and StarkWare's Volition are currently the most popular second-tier expansion solutions.This articleThe advantage of Rollup over Plasma is that all transaction data will actually be published on the chain, and all transactions have traces to follow, which is to solve the problem of "data availability". Rollup is divided into two categories of solutions, namely ZK Rollup and Optimistic Rollup.
Lianwen Note: If you want to know what is Rollup, you can check
This article
Get started.
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Expected in two years: ETH 2.0
In addition to tricky technologies such as Layer 2, the improvement of the performance of the Ethereum main chain ultimately depends on the upgrade of Ethereum 2.0, which is also the fundamental solution to the problem. Of course, even after ETH 2 is fully launched, the Layer 2 solution may be able to further increase throughput.
According to the current progress, Phase 0 of Ethereum 2.0 will start this year, when a one-way channel for conversion will be opened, and ETH 1.0 funds can be recharged into the Ethereum 2.0 network. Phase 1 is scheduled to start in 2021, when the Ethereum network will be divided into 64 regions. Phase 2 is planned to start in or after 2022, and this is the final phase, fully releasing the full performance of Ethereum 2.0.
Short-term solution: EIP-1559
Vitalik Buterin, the co-founder of Ethereum, has stated many times that if the EIP-1559 proposal is deployed and launched, it will optimize the overall fee rate structure of Ethereum, which is expected to reduce transaction costs in the short term.
EIP-1559 is an improvement proposal to reconstruct the gas fee structure of Ethereum. After it was proposed, it has been discussed and disputed many times, and has not yet been substantially advanced. To put it simply, EIP-1559 adjusts the original single Gas bidding mechanism to a combination of burning the basic fee BASEFEE and submitting extra tips to the miners. This solution also hopes to solve the problem of user experience and reduce user misoperation. Gas fee situation.
Coincidentally, a huge transaction fee occurred in the Ethereum network in the past few days, and it happened three times in a few days. Vitalik Buterin believes that EIP-1559 can greatly reduce this situation because users do not need to manually set fees.
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Block expansion is the most direct and fast solution, but everyone has been cautious about this solution. As long as the miners reach a consensus, the amount of Gas that can be accommodated in each block (which can be understood as the calculation amount of the Ethereum network) can be directly increased.
A few days ago, Ethereum miners reached an agreement to increase the amount of Gas that can be accommodated in each block by 20% from the original 10 million to 12 million. Bitfly, the parent company of mining pool Ethermine, said the upgrade could boost the number of transactions per second on the ethereum main chain from 35 to 44. Transaction fees have also dropped, with an average reduction of 20%.
But the developer community believes that block expansion should be more cautious, such as Péter Szilágyi and Vitalik Buterin and others. Szilágyi believes that the size of the blockchain will become larger, which will make it more difficult and expensive to synchronize and run a full node, and may also cause some DoS issues. Vitalik Buterin said that Sparkpool contacted him about the matter more than a month ago, and he opposed the decision to increase the gas limit.
In any case, this method is not a long-term solution, and it should not become a mainstream measure in the future. However, if the network capacity is in a hurry for some reasons, it is not necessary to adjust the block capacity. However, the rapid development of other expansion solutions is the right way.
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In addition to Tron, which closely tracks the development of the DeFi community, many other projects are also enhancing compatibility with Ethereum assets and Ethereum smart contracts.
Since USDT is currently the most liquid USD stablecoin, it is currently one of the most important on-chain assets besides BTC and ETH. While Ethereum has snatched the most USDT circulation from the Bitcoin network, other platforms also hope to obtain the most USDT liquidity from Ethereum.
For example, mainstream public chains such as Bitcoin side chain Liquid, Algorand, TRON, and EOS already support USDT. Since Ethereum and Bitcoin are not suitable for micropayment scenarios, TRON may become your third choice. As long as TRON does not encounter performance bottlenecks, it may seize a lot of USDT liquidity in Ethereum.
As for the compatibility of smart contracts, it is also a major trend of various public chains. At least for now, Ethereum Classic (ETC), NEAR, Binance Smart Chain, Polkadot, etc. have announced that they will be compatible with the Ethereum Virtual Machine (EVM). For developers, if they want to find a less crowded public chain to carry open financial applications, then these may be the best choice besides Ethereum.
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Wait, why do assets need to cross-chain to Ethereum?
Even if the computing resources on the Ethereum chain are already so tight, there are still many projects trying to cross-chain other assets to Ethereum, so that new assets can also enter the DeFi ecosystem, become collateral or enter more complex derivatives markets. Although this will also occupy the resources of the Ethereum network and increase transaction fees.
