According to Coin Metrics, Ethereum gas prices have already fallen before the price of ETH did.
The price of ETH is not the only thing that has dropped in recent months. The cost of using the Ethereum network has also dropped.
The average price of gas on the Ethereum blockchain is at its lowest level since March 2020, according to a report today by crypto market research firm Coin Metrics.
Background: "Gas" is the name given to transaction fees on Ethereum, and this is currently in the 15-30 Gwei range. That's less than 10 times the cost in April: that's when transaction fees soared into double-digit dollars as the ETH price soared.
One Gwei is a fraction of one ETH (0.000000001 ETH) and also a fraction of a cent. But if Gwei prices are so low, why are transactions currently averaging $8.15 - down from a low of $2.31 on 26 June?
Other factors behind the plunge in costs
That's because the two metrics, while related, are fundamentally different. Transaction fees are determined by multiplying the price of gas by the amount of gas consumed. Different types of transactions require higher gas consumption. For example, bidding on an NFT in an auction, conducting a trade on a decentralised exchange or sending ETH potentially incurs different costs because these transactions differ in complexity.
To put it another way: You will spend more on petrol if you drive across the country than if you just drive through the city - no matter how high the price of petrol is.
And exactly like "real" fuel, gas prices rise or fall depending on demand. When many people use the network, prices go up.
According to Coin Metrics, that's part of what's happening right now. Projects are also increasingly using "scalability solutions" like Polygon and Arbitrum, which take pressure off the Ethereum network.
But there are two other factors, according to Coin Metrics
First, gas prices began to fall in late April after the gas limit was increased from 12.5 million to 15 million gwei per block - "well before the crash" of the ETH price from a record $4,165 to the current $2,335. The result of the change was that more transactions could be stuffed into each block, lowering demand.
Second, arbitrage bots looking to profit from decentralised exchange transactions have traditionally raised fees - voluntarily paying higher gas prices to push through such transactions because they can make a fortune trading. But this activity is also being moved off the Ethereum blockchain into parallel chains, which are like the side roads to the Ethereum highway.
But one should not get too used to it. Ethereum gas and fees will be adjusted again on 4 August with the "London" upgrade.