I’m probably not the only one who finds Ethereum gas fees prohibitively expensive. The Ethereum blockchain is perhaps the most widely used of them all today. It has the most use cases for the modern blockchain ecosystem. And despite being faster in throughput or TPS (transactions per second) than Bitcoin, it is still not quite able to scale enough to keep up with growing demand. That’s where second layer solutions like Arbirtum, Ploygon/MATIC and others come in.
Bitcoin can only process about ten transaction per second, and Ethereum much more than that but still not as many as Visa for example, which processes thousands per second. And that is why ETH has such high transaction fees, called gas fees. ETH is a massive blockchain and growing by the day as more projects utilize its services to deploy their smart contracts, dApps and DeFi decentralized finance products. ETH is by far the top blockchain today for utility.
Despite the imminent arrival of ETH2.0 and its move to PoS, users are still paying those gas fees in order to get ahead of the queue. By paying a higher gas fee, one can push their transaction to the front of the queue and ensure it is processed before the others. This is fine for whales and huge transactions, where paying a few dollars more to speed up the finality of your transaction is small change.
However, for the average retail user, specifically in the emerging markets or third world, these few dollars extra for each move of our ETH tokens ends up being too pricey. The problem is that the Ethereum blockchain is becoming so popular, yet cannot keep up with the pace and demand of all these transactions. This was especially evident when Ethereum began supporting gaming and NFTs in recent years.
I was keen to mint my NFT artworks on OpenSea, for example. It’s a leading NFT gallery and market with by far the most users and exposure globally. However, the cost to mint my NFT went out of range simply because the ETH gas fees required to perform the minting transaction were unaffordable to me with my third world ZAR currency here in sunny South Africa (ZAR17 - $1.). As a result I use the Hive NFT gallery instead, which is much cheaper for minting my artworks.
Nevertheless, if I want to get more exposure for my art, so that it’s seen by more people and on a more widely used blockchain, then I need to mint my NFTs at OpenSea. That’s when I found Ploygon which uses the MATIC token. This is a second layer solution which acts as a bridge to the first layer Ethereum blockchain. One can mint NFTs on Polygon for free practically, and they are visible at OpenSea website on the MATIC chain. It’s almost as good as having them on the Ethereum blockchain, and I can price them for sale in ETH.
Another second layer solution which enables us to bypass the expensive gas fees on ETH is called Arbitrum. It is known as an “optimistic rollup” technology which allows ETH to scale or facilitate more transactions. It thus increases the throughput on the Ethereum blockchain by performing some of the computation and data storage off-chain, before settling transactions on the Ethereum mainnet.
In other words, developers and coders are constantly coming up with solutions to the shortfalls in today’s early era of blockchain technology. They are either designing new blockchains, like Solana, which can handle thousands of TPS, just like Visa and Mastercard, or they are creating sidechains to bridge with the Etherum mainchain. Solana is sometimes hyped to be the “Ethereum killer” or the product that will overtake Ethereum in being the dominant blockchain today, with the most use cases. I doubt that since Ethereum is also improving constantly, with the ETH2.0 move to PoS coming in September.
Either way, these improvements to the Ethereum services are a real blessing to the industry and great for small retail users like me. ETH gas fees have only grown in recent years due to increased use and adoption. Now with these second layer solutions like Arbitrum, scalability and fees are no longer an issue. Although being a second layer blockchain in its own right, Arbirtum doesn’t have its own cryptocurrency token, but uses ETH if necessary.
Arbitrum works very well overall and is able to actually bring down gas fees by between 5-20x, depending on the type of transaction, which is massive. This is done by using a system called “Optimistic rollup” which assumes that the transactions are valid by default. Remember that blockchains need to have “Byzantine fault tolerance” which means that they have to prevent the double spending problem.
A blockchain is basically an open distributed ledger. It’s a record keeper with timestamps. That’s why it works so well for the finance industry. It is able to do what a bank can do, only cheaper, safer and faster ideally, because it removes the bank, the middle man, from any transaction. The code itself, the blockchain is the accountant or record keeper. That’s all that it is – a data base.
And for it to work properly, it needs to be able to keep the transaction records efficiently by ensuring that a user does not double spend the money. They could, for example, send some money or coin to one account, and then somehow immediately resend it to another account, thus creating a double spend, unless the record keeper or accountant can keep efficient records fast enough to keep up with the users.
Therefore another system of accounting or record keeping is called “zero-knowledge”, where a transaction is not considered valid until it is validated, based on the past transactions on the blockchain ledger. But somehow Arbitrum uses the opposite system of coding where it is optimistic that each transaction is by default valid. This saves time usually spent waiting for the transaction to be confirmed and thus increases TPS or throughput. It allows ETH to scale and hopefully meet the demand seen by Visa or Mastercard of several thousand transactions per second.
One concern is that Arbitrum is highly centralized. The system that runs the sequencer for their transaction data collection is not distributed over many computers but is in one place. In January 2022 that computer failed briefly and Arbitrum blockchain went down for a while. They are still in Beta mode and there is more improvement due in time to come. Blockchain technology is still very new and subject to bugs and glitches.
One thing I wonder about is what will happen to these second layer blockchains like Polygon and Arbitrum when Ethereum moves to ETH2.0 PoS mechanism in coming weeks? And what about ETH’s sharding technology which is imminent? Sharding is a system of parallel processing of transactions across separate blockchains known as shards. This will greatly increase Ethereum’s scalability and throughput. Will Arbitrum and Polygon still have a use when ETH is able to scale by itself?
Another second layer solution is called Optimism which, as the name suggests, also uses the “optimistic rollup” mechanism, like Arbitrum. Arbitrum total value is currently around $990 million whereas Optimism is only valued at around $360. Besides these, other “zero-knowledge rollups” that do not assume that each transaction is valid by default, are launching throughout this year. Arbitrum is less than a year old now, having launched in August 2021. It also uses the same smart contract coding language as Ethereum. And the Uniswap dex (decentralized exchange), one of the top globally, runs on Arbitrum.
So in this fast growing industry every challenge, like ETH fees and scalability, is being met with newer and newer solutions by the day. As a result blockchain technology can only go from strength to strength going forward. This is why mainstream legacy banks fear it and appear critical of it. They don’t want to be made extinct by this new emerging technology. First they will laugh at it, then they will fight it but in time they will use it to run their CBDCs. Let’s hope cryptocurrency can always remain at least one step ahead.
(image pixabay)