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DeFi In The Future 4: Gas
TL;DR: Gas fees bring costs and frictions that are off-putting to anyone used to Web2 platforms. While gas is currently a one-size-fits-all model, new options are coming onto the market, bringing a better UX for Web3 services and the next billion users.
You peruse the shelves of the grocery store. This is your own personal grocery store in the metaverse, delivered by a combination of Big Data, AI, VR, and blockchain. This means that 1) toothpaste is conveniently stocked next to bacon and shotgun shells, and 2) you don't have to leave your apartment to buy them. You push your shopping cart to the till with some difficulty (it has a bad wheel; some things are universal constants, even in the metaverse), and shove it into the back of a delivery van. Funds are transferred from your account as you do so.
Since this is your state-issued fiat account, you also pay a fixed percentage of the transaction as a platform fee. As the government slogan goes, "Gases is taxes". (A more accurate jingle would be "hyperinflations meet your tax obligations", but that didn't poll well with focus groups.)
In the private sector, of course, anything goes. Some chains still charge a flat fee, like in the olden days. Other organizations take a more market-driven approach...
REX Wire's "DeFi In The Future" series takes a look at the evolving landscape of the blockchain sector and unpacks what things might look like in five years. This week's article explores how the concept of gas might change as platforms seek to become more user-friendly.
No Escaping Transaction Fees
Transaction fees (also known as "gas" since the publication of Ethereum's white paper) have always been a feature of the blockchain space. There's no such thing as a free lunch, and the miners and nodes that secure the network and process transactions have to be paid for the work they do. Satoshi Nakamoto included the idea of such fees in the Bitcoin white paper, as a means of incentivizing nodes to support the network, supplementing the decreasing block rewards they would receive. Almost every blockchain platform launched since then has included transaction fees.
Of course, the idea of transaction fees is not specific to the blockchain world. Fees on credit cards can total 4% (more in some countries) when all the different charges are taken into account. These are often passed on to customers. PayPal charges 2.9% plus $0.30 for US transactions and 4.4% plus a fixed fee for international ones. Brokers charge a commission fee on forex and share trades.
These fees are largely hidden, but even when they're not, they generally don't represent unnecessary friction because they are paid seamlessly and charged in the currency that you're already spending. For all except the simpler first-generation blockchains, like Bitcoin (where you can only transact in one token), the same is not true.
If you want to send someone USDC on Ethereum mainnet, you'll need some ETH to do it. If you want to exchange BUSD for USDT on Binance Smart Chain, you'll need some BNB to pay gas. In other words, there's an additional token that ordinary users don't actually need for anything other than paying for the services they do want. Contrast that with the typical UX in TradFi, anywhere from an online trading platform to a physical store.
And that's just financial transactions. In the Web3 world, a "transaction" is any operation that results in a change to blockchain state. That makes it more like having to pay to send an email, update a website, or change your status on social media. (Spoiler: You already do pay, with your data, resulting in downsides including but not limited to intrusive advertising, loss of control over personal information, risk of data leaks and hacks, loss of privacy, and dysfunctional democracy. Doesn't sound so "free" now, does it? Nonetheless, paying for every activity is an alien concept for most users, and topping up their wallet with gas tokens is an unnecessary friction.)
Holding a network's native token is fine if you want to speculate on the future value of the platform. It's not so great for the people who actually want to use the services built on the network with minimal fuss but have to keep topping up their wallets.
Understanding Ethereum Gas
Gas (transaction) fees on Ethereum are paid in ETH and are a product of two variables: The "gas limit", or how much work a transaction requires from network validators, and the price of ETH itself. It's a lot like taking a trip in a car, where the total cost of the journey depends not just on how many units of gas you need to get to your destination, but how much you pay for each unit of gas.
Units of Ethereum gas are priced in "gwei", or billionths of an ETH (0.000000001 ETH). The cost of each unit is determined by supply and demand, which is a function of network traffic. If not many transactions are being submitted to the network, there's not much demand for gas. If blocks are full because everyone wants to get in on the Bored Zombie Penguin mint, users have to pay more to incentivize validators to prioritise their transactions. At times of low network use, the price per unit may just be a few gwei. At times of high demand, when the network is badly backed up, the price can be hundreds of gwei.
A complex smart contract interaction like an AMM swap requires more work by validators and so will consume more units of gas (i.e. needs a higher gas limit) than a transfer of ETH or tokens. Token transfers cost more than simple ETH transfers because they involve interaction with the token contract.
Sites like Etherscan provide an estimate of current gas prices per unit, and the rough cost for different types of transaction.
Gas limits are generally calculated automatically by wallets like MetaMask, but can be increased or decreased manually. You can also increase the fee per unit to have your transaction prioritized and confirmed more quickly, or reduce it if you're not in a hurry.
Be warned, though: Just like a car journey, if you don't allocate enough gas for a transaction, it will fail before completion—but you will still have spent the ETH.
What Are The Alternatives To Gas?
While gas is a fair way to pay for network use, it brings a lot of friction and uncertainty for users, due to the need to hold a balance of the gas token, the changing cost of gas units, and the fluctuating price of the token itself (i.e. you don't know how much ETH you'll need in advance, and you don't know how much each unit of ETH will cost).
High-capacity chains reduce the problem of unpredictable gas prices, but that doesn't solve the problem of either constantly topping up a wallet or maintaining a balance of tokens that may fall in value. There are at least two obvious solutions.
The first is to create chains on which, one way or another, gas is paid in stablecoins (ideally decentralized stablecoins to avoid single points of failure). This is an idea that is already being explored in the blockchain space, but hasn't yet caught on widely. Gnosis Chain uses xDai as its native token, which is a bridged version of MakerDAO's DAI stablecoin, meaning transaction fees are effectively paid in dollars.
The advantage here is that the standard "pay as you go" model of Ethereum and EVM blockchains does not change; the fees users pay are still calculated directly from the complexity of the transactions they make and the price of gas. The difference is that fees are paid in a currency the user holds anyway, and one that is stable in value (unlike ETH), so users are not exposed to market risk.
The other alternative is to do away with the idea of gas in the conventional sense altogether. This is the approach taken by SKALE Network. Instead of gas, transactions require sFuel—a token with no market value that acts to prevent network spam. Since a little sFuel goes a very long way, users can be airdropped all that they need for thousands of transactions when they first interact with a dApp.
Businesses and other organizations pay for their own SKALE Chains. Each organization can then decide how it wants to cover the costs of running its chain. That could take place via commission fees charged on the services that operate on each chain. It could equally be charged as a monthly subscription fee to users, or recouped through advertising. In some cases, it might simply be offset as a business expense (for example, if the chain was used as an e-commerce platform).
This approach is not only highly flexible but enables a Web2-style UX that is familiar to regular users.
While you wait for your shopping delivery, you log into your favorite MMO. Like most major games, it's built on its own chain, which in this case is run by different guilds. Each guild operates a cluster of nodes and earns revenues from various services built into the game: Royalties on NFT sales, commission fees on in-game purchases and currency swaps, advertising, and so on.
Because you're a member of a syndicate that runs a rent-an-army service to gamers looking to beef up their forces, you own one of those nodes and get free txs. A battle is about to start in the Badlands of X'Tor, so you saddle up K'vin, your dragon, and join the fray. Well, alright, you soar majestically and safely several hundred feet above the fray so you have a good view of the two mobs of low-paid mercenaries you've sold to commanders on either side of the battle hacking each other to pieces, with the dollars rolling in for every severed limb and scream.
You're such a baller.
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