High Gas Fees on Ethereum - who’s to blame?

Analyzing the reasons behind the recent surge in Ethereum's gas fees and its impact on users

[chart] the impact of Binance listing on Ethereum gas fee
Art created for MetricsDAO by artghost

Ethereum, the largest cryptocurrency by market capitalization except Bitcoin, is known for its smart contracts that enable a myriad of innovative applications. However, it has also been beset by rising "gas fees"—the cost of conducting transactions and executing smart contracts on the Ethereum blockchain.

Gas fees on Ethereum are determined by a sort of auction system, where users compete to have their transactions included in the next block by bidding a certain amount of Ether as a fee. The primary cause of higher fees is an increased demand for transactions — to be expected with growth of the ecosystem.

While Ethereum’s switch to proof-of-stake consensus eased gas prices, a huge spike in transactions can still drive them up. MetricsDAO community analyst Pierandrea did a deep dive into the recent surge in gas prices that hit transacting users. Here are the main takeaways:

Rising surge lifts all

During the gas spike in late April 2023, there was a massive increase in utilization of Uniswap, a leading decentralized exchange (DEX) that runs on Ethereum. It was the final destination for most transactions in the reference period.

[chart] Uniswap and gas price surge on Ethereum
Source: Pierandrea

From April 15th onwards, we can see the impact of PEPE’s skyrocketing demand and price (we covered the meme token surge data last week and PEPE in particular before that). The highest gas price was on May 5, when the average hit a mind boggling 155 GWEI ($ N).

[chart] Average gas price on Ethereum in April and May 2023
Source: Pierandrea

The common denominator

Looking closely, Pierandrea found a common thread between PEPE, May 5 and spiking gas fee. Turns out it is Binance!

On May 5, Binance announced the listing of meme coins PEPE and FLOKI. This was followed by a sharp rise in swap activity on the PEPE-WETH pair on Uniswap, which in turn led to the surge in gas price.

Don’t mind high gas

Now that we know what was behind the surge, how did users react when their transactions became much more expensive? Did they stop trading?

No, they did not. Despite the higher gas prices during April and May, Ethereum continued to attract new users, showing the enduring pull of this blockchain.

[chart] Did high gas prices deter users?
Source: Pierandrea

Impact on Layer 2

Normally, one would expect that a rise in a Layer 1 blockchain’s gas fee would send more users running to Layer 2s. However, there is no evidence of such a flight in this case.

[chart] Despite high gas prices, Ethereum gained new users
Source: Pierandrea

Trading volumes remained relatively stable on DEXs.

Avoiding NFTs

At the time of the gas spike, there was a slight decrease in NFT transfer and trading. This makes sense — users might not find it worthwhile to pay this much in gas when they are trying to snag or flip jpegs.

[chart] NFT transactions were hit by high gas prices on Ethereum
Source: Pierandrea

Three cheers for Ethereum

While validators pocketed the high fees, the real winner is the Ethereum blockchain. With increased activity on the chain, the bids for block space go up. This translates into higher gas fees as users try to get their transactions confirmed quickly, leading to more ETH burn to help it stay deflationary. On May 5th alone, over 14,000 ETH were burned (equivalent to over $20 million).

[chart] Ultimately Ethereum gains from high gas prices
Source: Pierandrea

The future might be different

This surge in gas fees, caused mainly by launches of popular meme tokens, had a minimal impact on users this time – but this won’t always be the case. If network fees remain high for long, for whatever reason, we believe that you should expect to see a wider and accelerated adoption of Layer 2 solutions.

Check out the analyst's full dashboards to learn more:

More from the top Metrics Minds:

Don’t forget to subscribe by hitting the button on the bottom right of your screen!

Explore and request the work of these and other stellar data analysts on the new Metrics App:

Metrics App |MetricsDAO Twitter |  MetricsDAO Discord