The Ethereum (ETH) ecosystem suffers from congestion that results in high transaction fees. With an update called “Rollups,” ETH creator Vitalik Buterin wants to improve the situation.
With average transaction fees (gas fees) of currently almost 20 US dollars, Ethereum (ETH) shows the long-known problem of the network’s lack of scalability. Ethereum is still technologically based on proof-of-work as a protocol and thus only gets to about 15 transactions per second (TPS), far too little for the rush contributed by DeFi. The changeover to Ethereum 2.0 with proof-of-stake as a future-proof protocol has started, but will not be completed until the end of 2021 at the earliest. As an interim solution, Vitalik Buterin, the founder of Ethereum, has now presented an update under the title “Rollups”. Speaking on The Tim Ferris Show podcast, Buterin said rollups would allow for at least 1,000 TPS on Ethereum, and thus lower transaction fees.
Background on rollups on Ethereum
Buterin published an article on rollups on his blog, which he calls a non-complete guide toward rollups. So, technologically, there are still some questions to be answered in terms of feasibility. In general, Rollups is intended to offload recurring transactions and commands on Ethereum from the actual blockchain and have them processed in Smart Contracts in a parallel blockchain. Only final results of a smart contract are documented in compressed form again in the actual ETH blockchain. Such concepts are already used, for example, by Synthetix and Polygon from the DeFi division. Buterin hopes rollups could become a reality at Ethereum in the coming months.
Meanwhile, Ethereum has another proposal to reduce transaction fees, which is being discussed under the acronym EIP-1559. Again, there are still technological difficulties to be solved, and since EIP-1559 would change transaction fees on ETH in principle, it would also need approval from miners. The next upcoming upgrade on Ethereum, Berlin, is scheduled to go live on April 14, but will not bring any major changes in terms of gas fees.
Bottom line: transaction fees are becoming Ethereum’s Achilles heel
With more than the equivalent of $40 billion in capital committed to DeFi under Ethereum, the division for ETH is the growth engine par excellence. But at current transaction fees, DeFi is only worthwhile for larger amounts, and quickly exceeds potential profits for smaller investments. Thus, Ethereum sees a competitor in the already modernized Binance Smart Chain, which is successfully playing catch-up with DeFi. Most investors should be relatively indifferent to how Ethereum quickly recovers transaction fees. They care more about finding an efficient ecosystem under ETH. So Buterin has his priorities right for now, but he also needs to drum up support.
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