519 plunge causes average price of Gas to soar 210%, how does Gas price affect the ethereum ecology?

On the evening of May 19, CoinMarketCap data showed that ETH plunged sharply in the short term and was quoted at a low of $2014.72, a “dive” of 70.64% from the intra-day high of $3,437.94.

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On the evening of May 19, CoinMarketCap data showed that ETH plunged sharply in the short term, quoting a low of $2014.72, a “dive” of 70.64% from the intra-day high of $3437.94. As a result, the average price of Ether Gas Price reached 236 Gwei, up 210% from the previous day, and the intra-day average price amplitude was a staggering 2935%.

Gas Price has become a topic that cannot be bypassed in the development of Ether, and this has become more prominent after the DeFi explosion.

Benefiting from the DeFi boom, ETH has been in a strong uptrend in recent years. According to CoinMetrics’ corrected coin price data, the average monthly gain of ETH this year is about 33.66%, and the highest average monthly gain reaches 47.53%. Especially in the recent past, ETH has repeatedly stood on the $4,000 mark and set new all-time highs, an eye-catching performance.

However, there are two sides to everything, and DeFi also brings some problems for Ether.

First of all, the surge in user demand for on-chain transactions has led to high Gas fees. difficulty, or boosting Gas growth.

Secondly, there is a redistribution gap in the wealth effect brought by DeFi. pAData analyzed the Ether mining data and MEV data and found that miners and arbitrage traders gained most of the benefits: 1) Gas fee has become an important source of income for Ether miners, and it is the main driving force of miners’ income, and the average percentage of Gas fee reached 44.40% this year, and the monthly increase of Gas fee is basically higher than the increase of mining income in the same period. (2) Under the arbitrage opportunity, Priority Gas Auction (PGA) has formed the Maximum Extractable Value (MEV) market with great potential, which has reached 615,100,000 ETH in total, and the total daily MEV accounts for about 1,000,000 ETH. The total daily MEV averages about 5.80% of the total mining revenue, and DeFi’s arbitrage traders are the main capturers of MEV, capturing about 88% of it.

In the past, the main method to improve the Gas fee problem was to increase the block Gas Limit by consensus, but this method is becoming less and less effective. This can only temporarily relieve the upward pressure on the price of Gas, but eventually the Gas fee will still rise driven by the rapid growth of the demand for on-chain transactions.

Ether fees already account for 44% of mining revenue, on average

Gas price day-to-day volatility has increased

Influenced by the DeFi boom, the price of Ether Gas has grown significantly since the second half of 2020, with the monthly average price rising from 57.3 Gwei to 122.9 Gwei this month, an increase of 114.56%. It is worth noting that the monthly average price of Gas has always been higher than 110 Gwei so far this year. among them, the lowest monthly average price in January reached 112.1 Gwei, which is comparable to the level of DeFi’s rising period than last August, and the highest monthly average price in February reached 190.6 Gwei, which is comparable to the level of DeFi’s peak period in September last year.

In terms of monthly increase, the price of Ether Gas continues to maintain a high growth rate. Since the second half of last year, the overall average monthly increase of Gas price is above 42%, while the highest average monthly increase is above 160%. However, it is worth noting that the average monthly rate of Gas price increase has decelerated since this year. In the second half of last year, the overall average monthly rate of Gas price increase was about 58.42%, while this rate has dropped to 22.60% since this year.

On the other hand, the day-to-day volatility of Ether Gas price tends to enhance slightly, which means that the daily average price of Gas varies more greatly and is less stable. Last year, the average daily inter-day volatility of Gas price was about 3.22%, while so far this year, the average daily inter-day volatility has increased slightly to 3.58%. And in fact, Gas prices are not only more volatile inter-day, but also more volatile intra-day. For example, according to Etherscan’s monitoring, the average daily intraday volatility of Gas average price was as high as 373.31% in the recent week.

According to the current rules of using Etherscan block space, that is, under the optimal Gas fee auction mechanism (Priority Gas Auction (PGA)), the increased volatility of Gas price will increase the difficulty of valuation for users, who lose their bargaining power and can only bid according to their own transaction timeliness needs and ability to pay for transaction costs. This may contribute to the growth of Gas prices, while also providing room for maximum extractable value (MEV).

DeFi wealth redistribution chasm exists.

44% of handling fees and 615,100 ETH of MEV accumulated

Over the past year or so, DeFi has demonstrated its potential to coordinate and distribute global capital, but the tremendous value that DeFi brings has not been captured by most ordinary users, with miners and arbitrage traders becoming the main profiteers and a redistribution gap exists.

According to statistics, so far this year, the average daily transaction fee for Ether has reached about 11,500 ETH, up 176.39% from last year’s daily average of 4,164 ETH. The highest single-day transaction fee this year is about 31,700 ETH, and there are 5 other days when the single-day transaction fee income exceeds 20,000 ETH. From the perspective of the fee ratio, the average proportion of the fee to the total mining income this year is about 44.40%, which is about 25 percentage points higher than the average value of 19% last year.

Handling fees have become an important part of miners’ income, and moreover, fee income is still the main driving source of miners’ income improvement. Based on the relative change in the monthly increase in fees and the monthly increase in total mining revenue, the monthly increase in fees has been higher than the monthly increase in total mining revenue in the vast majority of months so far last year.

Continued increases in fees may also affect miners’ mining strategies, impacting empty and unclear block rates. According to Etherscan, the amount of Ether uncle blocks output has been steadily decreasing so far last year.

In addition to mining, there are plenty of arbitrage opportunities in the DeFi world, based on the currently implemented Priority Gas Auction (PGA) mechanism, which creates a potential Maximum Extractable Value (MEV) market. MEV is the profit earned by miners, validators, sequencers, and other privileged protocol participants through the ability to arbitrarily include, exclude, or reorder transactions in a block. MEV can be divided into various types based on the cause, but 97% of MEV currently comes from arbitrage transactions, which in turn drives up the price of Gas in turn.

According to MEV-Explore, MEV has exponentially exploded in growth since last year, having grown by 1,113.21% since the second half of last year and 45.41% this year. As of May 16, Ether MEV has accumulated to 615,100,000 ETH, equivalent to $554 million. Among them, only 12% is acquired by miners, and the remaining 88% is acquired by traders, where traders mainly refer to arbitrage bots.

Despite the rapid growth of MEV, it is still very small compared to the size of the mining industry’s output. According to statistics, last year, the daily MEV size only averaged 5.62% of a single day’s mining revenue, and this year it has increased slightly to 5.80%, remaining largely stable.

It is because the relative size of MEV is still much smaller than mining revenue that most miners are currently not yet trying to capture MEV themselves. however, with the rediscovery of MEV value and the further application of capture tools such as MEV-Geth, more and more computing power will join the MEV battle in the future.

The increase in the number of transactions is higher than the increase in the Gas cap during the same period.

Raising the cap is not effective in alleviating the rising Gas price

The problems related to the rise of Ethernet Gas fee have become the main symptomatic point for the underlying network and the upper ecology to restrict each other’s development. In the long run, 2.0 upgrade is inevitable, and in the short term, it was mainly improved in the past by raising the block Gas cap to achieve a small short-term expansion.

Since 2017, the Gas cap for Ethernet blocks has been raised a total of six times, including two times in 2017, one time in 2019, two times in 2020, and one time in 2021. 2020 has been raised three times in less than a year and a half so far, which is the same as the total number of increases in the three years from 2017 to 2019, and it is obvious that the frequency of Gas cap adjustment per block has increased recently.

In fact, the ethereum network has been running at high capacity for a long time since May 2020, with Gas usage per blockchain consistently above 90%, and consistently above 95% after June. The long-term higher Gas usage is also one of the main reasons for increasing the frequency of Gas cap adjustment.

However, the attempt to stabilize Gas price by increasing block capacity is like drinking hemlock, which can neither solve the root of the problem nor its effectiveness is decreasing.

From the relative changes of the Gas cap increase over time and the increase in the number of on-chain transactions over the same period, that is, the relative changes between the incremental supply and the incremental demand, except for that upward adjustment during the bear market from 2018 to 2019, the Gas cap increase over all other adjustment periods was much lower than the increase in on-chain transactions over the same period. This implies that the Gas cap increase can only temporarily ease the upward pressure on Gas prices, and eventually Gas prices will still rise driven by the rapid growth in demand for on-chain transactions.

In addition, there is no more data yet to corroborate that the application of MEV-Geth can make transaction packaging more transparent and thus lower Gas prices. Although Gas prices fell as low as 45 Gwei at the end of April when MEV-Geth was adopted by 58.8% of computing power, they have since rebounded to a high of over 290 Gwei, driven by a surge in trading of canine Meme Coin such as SHIB, AKITA and ELON.

And the upcoming EIP1559 proposal to be implemented in the London Upgrade is believed to help alleviate the problems associated with rising Gas prices, which will implement a flexible Gas cap mechanism and a transaction fee mechanism that coexists with base fees and tipping fees, the latter of which also brings deflationary expectations. Although, the specific impact of the proposal on Gas prices cannot be measured at this time, however, if this reduces miners’ income, it will likely facilitate the establishment of out-of-agreement markets, such as MEV, which will likely have a more far-reaching impact.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/519-plunge-causes-average-price-of-gas-to-soar-210-how-does-gas-price-affect-the-ethereum-ecology/
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