In an unexpected turn, Ethereum’s gas fees have recently dipped to levels not seen since 2020. On August 10, users were astonished to see transaction fees as low as 1 gwei, or approximately $0.007, according to data from Etherscan. However, this was short-lived, as fees doubled the very next day and have continued to climb, now sitting at 6 gwei. Such low gas fees are a rarity in Ethereum’s history, with fewer than 20 days since May 2021’s Berlin hard fork seeing average daily fees below 10 gwei.
Low Fees, Low Activity: The Calm Before the Storm?
The sudden drop in gas fees may be tempting for Ethereum users, but experts are sounding the alarm that this calm won’t last long. Alice Liu, research lead at CoinMarketCap, explains that such low fees often correlate with periods of reduced network activity and bearish market sentiment. Ethereum’s price, currently hovering around $2,700, remains 45% below its all-time high of $4,850, despite the recent SEC approval of a spot ETH ETF.
"Gas fees are inherently volatile," Liu told The Defiant. "They tend to spike during U.S. business hours when demand is highest and dip during weekends or late nights. But extremely low gas fees like this are unlikely to stick around."
Matt Cutler, CEO of Blocknative, echoed these sentiments, noting that Ethereum Layer 1 (L1) gas fees have a history of sharp fluctuations. “We shouldn’t expect 1 gwei fees to last,” Cutler cautioned.
Layer 2 Migration: A New Home for Transactions?
One major factor driving the current low gas fees is the migration of users and activity to Layer 2 (L2) scaling solutions. L2 networks like Arbitrum, Optimism, and Coinbase’s Layer 2 Base have seen a massive influx of users, particularly following Ethereum's Dencun upgrade in March 2024. Data from L2Beat shows a 300% increase in Total Value Locked (TVL) on L2s, jumping from $12 billion last year to $36 billion today. At its peak in early June, TVL on L2s nearly reached $50 billion.
These Layer 2 networks are increasingly absorbing the majority of Ethereum’s transaction activity. For instance, Coinbase’s Layer 2 Base has quickly risen to second place by TVL, boasting a 40% market share and trailing only Arbitrum’s $14 billion TVL.
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Price Pressure: The Real Driver Behind Low Fees?
While Layer 2 solutions are undoubtedly contributing to the reduced demand on Ethereum’s mainnet, some analysts argue that the low gas fees are more directly linked to Ethereum’s price. Typically, when ETH’s value declines, so does transaction volume on the network, leading to lower gas prices.
“With Ether prices down, we’re seeing reduced transaction volumes and, consequently, lower gas prices,” Cutler pointed out.
Rising Network Supply: The Inflationary Impact
However, these low fees are not without their drawbacks. One significant concern for Ethereum holders is the potential for an inflationary network. Lower gas prices mean less ETH is burned during transactions, leading to an increase in the overall token supply. Data from ultrasound.money shows that only 273 ETH were burned on August 10, compared to 2,560 new ETH issued.
This inflationary trend might be temporary if transaction volumes pick up, as they typically do when gas fees rise. Historically, volatile gas prices have also triggered fluctuations in Ethereum’s supply, making the current situation one to watch closely.
The Price Conundrum: What’s Holding ETH Back?
Despite the factors influencing gas fees and supply, the underlying issue appears to be Ethereum's struggling price. The much-anticipated ETH ETF approval was expected to drive prices higher, yet the impact has been muted. Investors are left wondering what it will take to break Ethereum out of its current price slump.
In conclusion, while Ethereum users may enjoy the benefits of low gas fees for now, the consensus among experts is clear: these conditions are unlikely to persist. As network activity ramps up and market sentiment shifts, Ethereum’s gas fees are expected to climb once again, potentially triggering more volatility in both transaction costs and ETH supply. Investors and users alike should brace for the inevitable return of higher fees, as the current lull seems to be just a temporary respite.
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