Ethereum blockchain of the elite, as fees 114,000X more expensive than Solana

• Ethereum’s average transaction fee is 114,000X greater than Solana over the last six months
• Bitcoin transaction fees hit a two-year low this week
• Ethereum has by far the highest fees of the major coins, as well as the most variable, highlighting how vital the upcoming Merge is
• Bitcoin-inspired projects, such as Litecoin and Dogecoin, have succeeded in reducing fees but have compromised elsewhere to achieve this.

Intro

Cryptocurrencies are trustless – they require faith in only maths. No middlemen are present, such as the banks you require to process the transaction when you transfer cash to another account.

In order for this to work, it requires a consensus mechanism to validate the transactions on the blockchain. For this to function, transaction fees are required, otherwise there is no incentive for validators (or miners) to help maintain the blockchain. 

However, not all transaction fees are created equal, so we at Best Bitcoin Exchange set out to analyse some of the top cryptocurrencies, ascertaining which are the most expensive to use, and which are the cheapest.  

Ethereum in a League of Its Own

Everyone knows Ethereum is expensive to use, but we set out to quantify just how large the chasm is to other coins. 

Often viewed as the most threatening alternative to Ethereum’s throne as the King of DeFi, Solana boasts a swift block time of 0.4 seconds and a large block size of 20,000 transactions. This helps facilitate the basement level fees of $0.00025 per transaction. Thus, it can surpass 50,000 transactions per second (TPS) in comfort, which is the level VISA is capable of. 

This could not contrast more starkly with Ethereum. In fact, over the last six months, the average transaction fee on Ethereum has been 114,000 times greater than Solana. Sporting a block time of 13 seconds and block size of 70 transactions, it simply isn’t in the same league regarding fees.

The average fee on the Ethereum network is now $28.60, meaning that the network is basically unusable for small transactions. If you are spending half a million dollars on a Bored Ape, then sure – a $28.60 fee is manageable. But not everyone has half a million dollars to drop on cartoon monkeys; if you want to buy an NFT for $100, or send $60 across the network, then a $28.60 fee makes this completely infeasible. Hence, Ethereum has unfortunately become a blockchain of the elite in many ways.

It’s not just Solana that Ethereum compares unfavourably to. The below graph shows just how much of an outlier it is regarding fees. The scale means some of the coins’ fees (Solana, Cardano, Litecoin, XRP) are barely visible on the graph. 

Variability

It’s not merely the size of the fees that plague Ethereum – it’s also the variability. Gas, as transaction fees are known, depends on the transaction volume across the network. So in times of congestion, fees can skyrocket (think the Shiba Inu meme-buying frenzy, for example). Fees are thus often seen streaking past the $50 mark, as the graph below shows. 

Of course, scalability – which is tied to fees – is only one corner of the “blockchain trilemma”, which describes the difficulty of a blockchain achieving all three pillars: scalability, decentralisation, and security, without compromising on one. 

Solana, for example, may boast basement-level fees, but it has been plagued by breakdowns in recent times, with six outages of eight hours or longer since January. Ethereum, for its part, has had no such problems – showing that fees aren’t the be-all and end-all.  But they are important, and it’s a big problem. The data above only underlines quite how important the upcoming ETH Merge is, and it will be fascinating to see how much fees change after it goes live. 

Bitcoin

Bitcoin’s fees hit a two-year low this week, coming in at $1.04 per transaction – an enormous drop from the historic peak of $62.70 in April 2021. This big jump resulted from a significant fall in the Bitcoin network hash rate. Today, however,  the network hash rate is close to all-time highs, north of 200 TH/s. 

It’s a healthy snapshot of the state of Bitcoin, where innovation has been thick and fast regarding improving the scalability of the network. Once Ethereum pivots to Proof-of-Stake as part of the Merge, Bitcoin will be carrying the Proof-of-Work torch. 

In addition to hash rate, the decongestion of the mempool has helped reduce fees. In simple terms, the mempool is a collection of all the pending transactions which are not yet confirmed. With the Bitcoin blockchain having a block size of 1 MB, a large mempool encourages miners to favour more lucrative transactions, meaning customers pay more to avoid having their transactions stuck in the pool. 

Bitcoin Mining and the Declining Block Subsidy

At the time of writing, bitcoin miners receive a grant of 6.25 bitcoin for each block. Every four years, that reward is halved, eventually bringing the subsidy to zero in the year 2140. At that time, all 21 million bitcoins will be in circulation, and the miners will have to rely entirely on the transaction costs. Therefore, it is important for the long-term security of bitcoin that the transaction costs on the blockchain go up.

If everything goes “according to plan”, it will probably no longer be profitable for the average bitcoiner to shoot transactions on the blockchain itself. After all, the transaction costs must soon be sufficient to make it worthwhile for miners to secure the blockchain. The majority of bitcoiners then have to work via solutions such as the Lightning Network and, for example, via exchanges or other intermediaries. The theory is that the global adoption of bitcoin should ultimately facilitate higher transaction costs and thus the security of the network.

Variability

Of further comfort for Bitcoiners will be the variability in fees, as well as the level, with the standard deviation of fees falling drastically from $8.17 over the last year to $0.77 during the previous six months, and $0.43 over the previous month. 

Standard deviation is essentially a measure of the spread of data, and it means that 66% of all data falls within one deviation (so $8 above or below the average level when looking at the one-year sample, but within $0.77 of the average over the last six months). Within two standard deviations, 95% of the data falls (so within $16 of the average over the previous year, but $1.54 over the last six months). 

Dogecoin & Litecoin

Derivatives of Bitcoin, the below graph display how one of the main goals of Dogecoin and Litecoin (if you can even assign goals to Dogecoin), which was fee reduction, has been achieved. Fees are negligible for Litecoin and tend to dwell below $1 for Dogecoin. 

Of course, it is important to mention that there are several aspects to these coins which Bitcoin obviously cannot compromise on – it is, after all, aiming to be the most secure and hardest form of currency around. Litecoin’s fees may be low, but it does not have anywhere near as much transaction volume as Bitcoin, while Dogecoin is an inflationary coin.  

Overall Comparison

Overall, the above comparison shows that Bitcoin is progressing well regarding fees. While it trails other coins that it inspired – Dogecoin and Litecoin, for example – these do not have the vision that Bitcoin does, and thus is an apples-to-orange comparison. 

Ethereum, on the other hand, is so far beyond the fee structure of other coins that it nearly breaks the axes on the above graphs. With both the level and the variability of fees sky-high, the Merge is badly needed so that this blockchain of the elite can become accessible to everyone – and so it will be interesting to revisit this analysis after the Merge is live.