The rising popularity of decentralized finance (DeFi) has brought fresh attention and optimism to the cryptocurrency sector with the total value locked on all protocols increasing from $1 billion to $59 billion in less than a year and the top 5 platforms accounting for $24.33 billion of the total value.
Rising gas fees have been one of the most noticeable results of the increasing interaction with DeFi protocols and currently, the Ethereum (ETH) network hosts the majority of the top DeFi projects. Gas fees have been steadily rising since November 2020 and reached a peak on Feb. 23 when the average transaction cost reached 373 Gwei which is approximately $11.72 at the current Ether price.
Average Ethereum gas price. Source: Etherscan
Since Feb. 23, fees have declined by 65% with the average cost dropping to 131 Gwei on March 3 and data shows that certain times of the day offer fees below 70 Gwei.
DeFi transactions decreased as the market corrected
One possible source for the declining gas fees seen over the past couple of days can be found by looking at the daily decentralized exchange (DEX) volume.
Daily DEX volume. Source: Dune Analytics
Data from Dune Analytics shows that trading volume on DEXs has been on the decline since peaking at $4.35 billion on Feb. 23 and the DEX daily 24-hour growth metric was down by 50% on March 3.
According to Connor Higgins, a data scientist at Flipside Crypto, fees have decreased over the past few days, but rather than attributing it to one specific cause, Higgins said that the high fees seen on Feb. 23 were an outlier when compared against the overall average on a longer time span.
“On average fees did fall, but it looks more like they are normalizing after a day of unusually high fees.”
Ethereum fees by the hour. Source: Flipside Crypto
As seen on the chart above, gas fees were significantly higher than the average between Feb. 22 and Feb. 23 when network congestion increased due to a market-wide sell-off that saw BTC price fall by 23.6% and altcoin prices also corrected sharply. After the market stabalized, gas fees returned to their normal average.
Rising NFT transactions clo the Ethereum network
Those using the Ethereum network might have expected to see a more meaningful decline in gas fees as DeFi transactions decreased but this has not been the case. One reason rates remain high could be the recent increase in activity in the Non-Fungible Token (NFT) sector.
NFT project history chart. Source: NonFungible
As more and more NFT projects launch and hold auctions, high transaction costs and network congestion are likely to continue on the Ethereum network until a widely integrated scaling solution is implemented.
Layer 2 solutions and protocols with cross-chain bridges to Ethereum, such as Polygon and the Binance Smart Chain, have emerged over the past two months and many projects are migrating to these platforms as the best short-term solution to high fees.
Projects like Aavegotchi and SushiSwap have shown how effective these networks can be following their recent integrations with Polygon, and it’s likely that other NFT and DeFi projects will follow suit as the transaction costs and speeds are superior to Ethereum.
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