One ongoing criticism of the Ethereum network has been the cost of gas prices needed to power smart contracts and facilitate transactions. This criticism has only gotten louder with gas price increases driven by the surging interest in DeFi and NFTs. Both of which are ecosystems built largely around the Ethereum network.
High gas prices are directly linked to the scalability of the network and the effort required to record transactions. They are a major impediment to the everyday adoption of Ethereum based dApps as the high prices make low-value transactions uneconomical. As a result, improving the efficiency of the Ethereum network to reduce gas prices and help it scale is a main focus of many Ethereum developers globally.
Why have gas prices increased?
Gas on the Ethereum network is rewarded to miners for their work recording transactions on the blockchain. The reason for gas prices increasing is a two-fold issue. The first part is due to increased demand for the network, and the second being a result of the complexity of transactions being made.
- Increased Network Demand
As the adoption of blockchain technology increases globally, the number of dApps running on Ethereum and transactions facilitated by the network also increase. The rate of this increase has been greater than the increase in miner resources that are available to service the network. Because miners are rewarded in gas for their efforts, users are forced to pay more gas to have their transactions prioritized by miners over others.
- Increased Complexity of Transactions
A compounding factor to the increased popularity of the network is the fact the complexity of individual transactions has also increased. This is largely due to the development of dApps that implement more complex smart contracts. Complex smart contracts require more computing power to process and are therefore more resource-intensive for miners to handle thus reducing the number of transactions each miner can process per unit of time.
For more information on Ethereum Gas and how miners process transactions we recommend you check out Cryptopolitan’s article here.
How do we scale the network?
Currently, Ethereum is able to process approximately 15 transactions per second but with improvements planned to be made it’s expected that Ethereum will be able to handle millions of transactions per second — for comparison, Visa’s network can handle approximately 1700 transactions per second.
There are two main schools of thought for how we can scale the Ethereum network, these are referred to as on-chain and off-chain solutions or as level 1 (L1) and level 2 (L2) solutions respectively.
Level 1 Scaling
Level 1 Scaling or on-chain scaling refers to changes in the Ethereum protocol that are made to the base layer of the blockchain to improve capacity. Changes at this layer arguably better maintain the integrity of the blockchain but create more linear efficiency gains. Examples of on-chain solutions include increasing block sizes to account for more data, more efficient address formats, and changes to signatures.
One of the more prominent L1 scaling solutions expected to be in effect sometime in 2021 is sharding.
- Sharding is the concept of breaking the Ethereum blockchain into smaller portions which makes it easier and faster to validate transactions. The shards will operate as independent chains on Ethereum 2.0 and will be linked to the Ethereum mainnet and synced periodically.
Level 2 Scaling
Level 2 Scaling, or off-chain scaling refers to changes at the application layer without modifying the base-level blockchain. Off-chain solutions have the potential for greater levels of scalability but as they operate off-chain there are greater security trade-offs.
Some examples of L2 solutions are:
- State Channels allow transactions to occur securely P2P off the base-level blockchain. Transactions that occur P2P are then validated and added to the main network on a periodic basis.
- Sidechains are independent blockchains that are attached to the blockchain using a two-way peg. They allow tokens and digital assets from one blockchain to be used in a separate one and then be moved back to the original if needed. Sidechains are responsible for their own security as they are independent of the main network.
- Plasma is the framework for building scalable applications. It acts as a child-chain by implementing smart contracts as an extension of the main chain. Transactions are verified among the smaller child chains before being combined and added to the main chain periodically.
When will improvements be made?
While the exact timeframe from L1 and L2 improvements to be implemented is unknown and is likely to happen in phases over a period of time, many in the crypto community are optimistic that we are very close to seeing solutions implemented.
Vitalik Buterin one of the creators and major figures in the Ethereum world made comments earlier in March stating that he expected to see significant efficiency gains from L1 and L2 solutions implemented in 2021. He made these comments on Tim Ferriss’s podcast where he spoke with Tim and Naval Ravikant which you can listen to here.