Ethereum is on of the most popular cryptocurrencies to mint and purchase NFTs.
Up until now the Proof of Work concept has required miners to use gas guzzling energy to complete transactions in to the blockchain and provide security for transactions and the network.
High energy mining has come up against tough scrutiny, and one by one countries are banning high scale mining rigs.
2022 will see the launch of Ethereum 2.0, which will see many benefits enter the network and relieve many frustrations, but will it reduce gas fees.
Ethereum 2.0 will move from a Proof of Work concept to a Proof of Stake concept. This migration will remove the need for energy consuming miners and replace with Ethereum owners staking their ETH to validate transactions on to the blockchain. This migration is likely to reduce gas fees overall.
Although there is an argument to say this transition will not impact gas fees in general, what is clear is that although part of the migration to Ethereum 2.0 is not only going to improve environmental factors and increase the number of transactions capable on the network – but considering gas fees are the biggest complaint, something needs to be done.
Solana is waiting in the weeks to take the crown from Ethereum in the NFT minting stakes, but so much rests on Ethereum 2.0.
How Could Ethereum 2.0 Reduce Gas Fees
The current practice of Proof of Work (mining to work on transactions for the blockchain) has two major drawbacks
- It requires environmentally unfriendly miners
- Mining comes at a cost, which must be absorbed within gas fees
At present when a transaction submission is made by a buyer, it creates a transaction order with an attached gas fee.
Current Ethereum Process
This gas fee is determined by the default settings or overwrite by the user.
A buyer can choose either a standard transaction, a slow transaction, or a faster transaction.
Each speed carries with it a GWEI fee. The faster the transaction the higher the GWEI, the slower the transaction the lower the GWEI.
GWEI is used as part of the calculation used to work out how much gas fee needs to be paid.
Although the transaction has a reference of speed, the speed at which the transaction is carried out remains unchanged.
What is really happening is the speed, and higher gas fee, attracts miners – who can pick and choose which transactions they process.
They of course always choose the highest gas paying transactions first, as this is more revenue for them.
So, by setting up faster transaction speed and paying higher GWEI amount, miners prioritize these, and they are processed faster than others.
This can be important if a major brand was to release an NFT set that is in huge demand. There may be many more people trying to mint an NFT than NFTs available.
In this scenario the highest paying gas fee bids will likely grab the NFTs above standard gas fee bids, and certainly above slow paying gas fee bids.
It is simple economics of supply and demand.
New Ethereum 2.0 Process
In 2022 Ethereum is moving to the new Ethereum 2.0 methodology.
The migration has three main aims:
- Tighten and enhance security in the blockchain
- Increase the number of transactions per seconds permittable
- Improve environmental factors
Now, as you will see, none of the three goals are intending to reduce gas fees.
This seems a little strange as the Ethereum blockchain could potentially lose out to up and coming networks such as Solana, which is hot on the heels of Ethereum, but also Polygon.
Polygon has a way to go to complete with Solana let alone Ethereum, but anything is possible in the NFT space right now.
We carried out some research that shows the average gas price on the Ethereum network is $116. This is 46% of the average NFT mint price of $249.
Almost half of the average of every mint is spent in Ethereum gas fees.
This means an average NFT must increase by 46% just to break even. This is unsustainable in the longer term.
The migration from Proof of Work to Proof of Stake puts the control in to a completely different set of transaction processors.
Moving away from miners, and in to Ethereum holders, may disrupt the industry enough to lower gas fees once and for all.
Fees will still be payable, as Ethereum holders will need an incentive to stake their Ethereum to validate transactions – but as the high energy costs not only impact the environment favorably, but also overheads, it should in theory mean more ETH holders that stake increase supply and reduce scarcity.
It is whether or not the Ethereum network can successful step in and help reduce gas fee costs once Ethereum launches, rather than allowing the holders to continue to drive gas fees to the levels we see them now.
If this happens it could see the slow demise of the Ethereum network, even after the migration to Ethereum 2.0, in favor of almost zero gas fee networks such as Solana.
Even Mike Tyson tweeted recently he is going ‘all in on Solana’.
With Solanart – the largest Solana based NFT marketplace – receiving a recent investment valuing it over $1 billion, this network is certainly one to watch.
When is Ethereum 2.0 Go Live
Ethereum 2.0 is due to launch between Summer and Autumn 2022.
No exact date has been set yet, so this date although speculation has been in the pipeline for over two years and recent communication from the founder, Vitalik Buterin, seems to suggest they are ready this year to implement the changes to the network.
Once the implementation happens, we will have to be patient to find out how this affects the Ethereum network and the NFT industry.
Considering gas fees are on average 46% of the average mint price of an NFT, and the environmental impact has been poor, it hasn’t stopped the Ethereum network – with the help of OpenSea – become the dominant force in the NFT industry.
Considering Ethereum 2.0 is set to only improve things, even if it doesn’t completely irradicate the eye watering gas fees most buyers and minters experience, unless it unleashes issues and security flaws into the network, the likelihood of it being outdone by competitors is low.
It is certainly an intriguing space to monitor.
