Ethereum gas fees have declined after their recent highs alongside a decline in DeFi transaction volumes but surprisingly, the rise in popularity of NFTs could push transaction costs back to new highs.
The rising popularity in decentralized finance (DeFi) is bringing fresh attention and optimism to the cryptocurrency market with the total value locked on all protocols increasing in price from $1 billion to $59 billion in less than just a year and the top 5 mainstream platforms accounting for $24.33 billion in total value.
Rise in gas fees have been one of the most noticeable consequences of the increasing interaction with DeFi protocols and currently, the Ethereum (ETH) network hosts most of the top DeFi projects. Gas fees have been continuously rising since November 2020 and reached a peak on Feb. 23 when the average transaction cost reached 373 Gwei. (approximately $11.72 at the current Ether price)
From Feb. 23, fees have declined by 65% with the average cost dropping to 131 Gwei on March 3 and data shows that certain times of the day offer fees below 70 Gwei.
Reports from Dune Analytics shows that trading volume on DEXs (Decentralized Exchanges) has been on the decline since Feb. 23 peaking at $4.35 billion and the DEX daily 24-hour growth metric was down by 50% on March 3.
A data scientist at Flipside Crypto, Connor Higgins speaks, “fees have decreased over the past few days, but rather than attributing it to one specific cause.” Further he added that the high fees seen on Feb. 23 were an outlier when compared to the overall average on a longer time span.
Higgins said: "On average fees did fall, but it looks more like they are normalizing after a day of unusually high fees.”
As more and more NFT projects are being launched and holding auctions, high transaction costs and network congestion are likely to continue on the Ethereum network until a dedicated scaling solution is implemented.
Layer 2 solutions and protocols with cross-chain bridges to Ethereum, such as Polygon and the Binance Smart Chain, have emerged over the past couple months and several other projects are migrating to these platforms as the best short-term solution to high fees.
Projects such as Aavegotchi and SushiSwap have shown how much effective these networks can be following their recent integrations with Polygon, and it’s likely that other NFT and DeFi projects will follow suit as the transaction costs and speeds are superior to Ethereum.