What are the Problems with Smart Contract Platforms?
Note: Data in this section last updated August 26th, 2022
Although Ethereum represents a substantial innovation, it is not without its faults. In particular, the protocol is plagued by high gas fees.
“Gas” refers to the fee required to execute a transaction on the Ethereum network. Whether you want to transfer a token, loan your assets on Ethereum or mint an NFT, you must pay gas to incentive the miners to approve your transaction and include it on the blockchain.
Because space on the Ethereum network is limited – it can only execute around 25 transactions per second – priority is determined by an auction process. This means that gas can get very expensive when the network is busy.
Unfortunately, lately the Ethereum network is always busy, so average gas fees have ballooned across the board. While we are in a bit of a lull at the time of writing, the 200-Day Moving Average transaction fee remains close to $10.00, a substantial increase from the $0.14 recorded three years prior.
This makes transactions impractical for the average user.
Average Gas Fees on the Ethereum Network
Keep in mind these are average fees for all transactions, including simple ones like a token ETH transfer. As some transactions – such as minting an NFT or borrowing / lending ETH – are generally much more complex, it is not uncommon to see fees of several hundred dollars.
In fact, in times of extreme congestion, commonly known as “gas wars”, fees can be in the thousands. The most notable example of this occurred during the Bored Ape Yacht Club’s April 30th launch of Otherside, where users had to pay a minimum of $6K in fees to purchase land!
The reason Ethereum is so slow is due to a phenomenon known as the scalability trilemma.
To understand the trilemma, it’s important to note that an ideal blockchain would possess three key features:
Scalability: The ideal blockchain is very fast, can handle a high throughput and is cheap to use
Security: It would be highly secure and resistant to external attacks
Decentralization: Perhaps the core tenet of the crypto movement, the ideal blockchain would allow anyone to join and not be controlled by any central authority
Unfortunately, the prevalent theory in the development community states that you cannot have all of these at once and that:
You can develop a secure and decentralized blockchain, but it will be slow
You can develop a fast and decentralized blockchain, but it will not be secure
You can develop a fast and secure blockchain, but it will be centralized
While there’s some debate over whether the trilemma is a hard law (which we will get into later), to date we have generally seen these tradeoffs play out with existing first and second generation blockchains making compromises. For example, networks such as Bitcoin and Ethereum have chosen to focus on decentralization and security over scalability, while others such as Binance Smart Chain are fast, cheap and secure, but at the cost of being highly centralized.
So how can we mitigate the trilemma and achieve security, scalability and decentralization simultaneously?
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