You Can Thank NFTs for Falling Ethereum Gas Prices

Decrypt DeFi is Decrypt’s DeFi email newsletter. (drawing: Grant Kempster)

Why are gas fees on Ethereum dropping?

Not so long ago, after all, it cost an arm and a leg just to approve a transaction on the network, let alone start swinging your digital fake in a yield farm. Now we are seeing moves below $10 (or at least close).

Gas, by the way, is crypto talk for the cost of doing business on Ethereum. Gas fees are essentially transaction fees, and when there is a lot of activity, it can cost more to have your transaction validated by miners on the network.

Gas fees on Ethereum are notoriously high. But since about January 10, they have been falling. When I double-checked the cost of token approval on the decentralized exchange aggregator 1inch, for example, I was presented with a fee of around $13. Jit is still quite high, but those who have been in DeFi for more than six months know that it is lower than it was.

So why the relief? Well, it could be due to several trends. Let’s test each as an explanation.

The first trend we can put to the test is the rise in layer 2 activity. expenses.

Unfortunately, when we look at the total value of Ethereum (in ETH, not dollars) locked up in Layer 2 solutions, activity has been relatively flat. Measuring this in terms of ETH rather than dollars also helps us eliminate peaks and troughs that may simply be due to the rise and fall of Ethereum’s price. Instead, we can just look at how much ETH is moving to these alternative networks, regardless of its dollar price.

TVL to ETH from November 17, 2021 to February 14, 2022. Source: L2Beat.

The chart above shows that the value of ETH on Layer 2 networks peaked in late January, declined slightly, and essentially stabilized.

But when we compare these values ​​to the median cost of gas over this same period, there is not really a clear relationship.

A white card with a blue lone cutting from left to right.
Median gas price over the past 90 days. Source: Dune Analytics.

We see a similar peak, but the flatline doesn’t quite line up. So, while this theory isn’t completely failed, we can certainly continue to search for answers.

After layer 2 solutions, perhaps the lower gas costs on Ethereum can be attributed to users switching to cheaper chains to like Terra, Solana, Avalanche and the others. Like the Layer 2 theory, there could also be some truth to this.

Indeed, at the start of 2021, Ethereum was essentially the only DeFi game in town, dominating over 97% of the market share. Just a year later, on January 1 of this year, that figure dropped to 62.35%.

Today, Ethereum accounts for 58% of the entire $123 billion DeFi market, according to DeFi Llama. That’s quite the plunge from 97% to 58% in just over a year.

Ethereum market share from August 3, 2020 to February 13, 2022. Source: DeFi Llama.

Yet, something isn’t quite right about that either. If we go back to when Ethereum was so dominant in January 2021 and compare it to today, gas prices are pretty much the same.

On January 17, 2021, the average gas price was 63 gwei (the unit of gas measurement, equivalent to 0.000000001 ETH); on the same day this year, the price was 154 gwei despite the appearance of activities on other channels.

Price of gwei from January 17, 2021 to January 17, 2022. Source: Etherscan.

So if this isn’t Layer 2 migration or Layer 1 wars, then what could it be?

What about the overall crypto market cooling? Crypto has, after all, roughly shaved $1 trillion in market capitalization since the November highs, and we can make the general assumption that this has led to an overall decline in activity. While that might be good fodder for Twitter, it’s far from a concrete answer.

The last stone left to be knocked down is NFTs, most of which are minted and traded on the Ethereum network.

Even though the overall crypto market capitalization has fallen over the year, the market for NFTs – tokens used to demonstrate ownership of other assets –showed no signs of stopping. OpenSea also broke another sales record in January, reaching $5 billion in sales for the month. A lot of celebrities like Paris Hilton, Eminem, Tom Brady and tons of others have continued to cram into the trend.

Well, it turns out that this NFT trading train has finally slowed down, if only briefly. And NFT trading costs gas, although much less than most DeFi stuff generally. So that could be our answer.

Sure enough, Ethereum volumes on OpenSea have fallen off a cliff in recent days.

Looking a little further, the relationship is even more striking. From February 1 to February 6, volumes on OpenSea halved, from $247 million to $124 million.

Ethereum volumes on OpenSea in millions. Source: Dune Analytics.

At the same time, the median gas price also fell by around 50%, from 134 gwei to 65 gwei.

Median gas price over the past 90 days. Source: Dune Analytics.

To verify that these USD values ​​in the first chart are not simply due to Ethereum price falling, we just need to check the price of ETH from the same time. According to data from CoinGecko, Ethereum’s price actually jumped from around $2,600 to $3,020, completing a 23% rally. This further reinforces that there has been a clear drop in volume on OpenSea that has very little to do with Ethereum’s price.

Moreover, if we follow this to the present day, the two charts are an almost mirror image of each other. There is a brief spike in volume on OpenSea on February 12-13, before it hits a cliff – the same with gasoline prices.

This makes NFTs the most compelling answer. Are these digital monkeys starting to lose some of their shine?

Yet the main cause of lower gas costs could be something else unseen. Or the best answer could very well be “all of the above”.

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