If you are familiar with the fast-growing world of decentralized finance (DeFi), then it’s likely you know a thing or two about gas fees. The price of doing business in DeFi, gas fees are the charges levied by developers to process transactions on a blockchain –– where the vast majority of DeFi transactions happen.
On Ethereum, gas fees are typically charged in gwei, a smaller fraction of Ether (ETH), Ethereum’s native token. This is done in order to break down the fees into more sensible units. For example, rather than charge 0.00000002 ETH for a transaction, which is a little tough on the eye, you might be charged a gas ‘price’ of 20 gwei.
On top of this, a user will pay for gas ‘used’, setting a gas ‘limit’. The Ethereum yellow paper stipulates that every transaction requires at least 21,000 gas, and as such, most user interfaces will set 21,000 as the default limit. The interplay of these two things will determine the price, and the higher you set them, the faster your transaction will be processed.
How do high gas fees on the Ethereum Network affect DeFi and the DEX Ecosystem?
1. Ethereum gas fees can sway consumer demand, as higher prices generally lead to a lower number of transactions over time.
2. Less demand means lower users on the network, which subsequently lowers gas fees, creating an equalizing effect.
3. Ethereum whales tend to dominate the network during periods of high gas fees, leaving smaller retailer users sidelined.