How much is too much to pay for a crypto transaction?
Five cents, according to the creator of Ethereum, the blockchain on which most cryptocurrency-based projects are built.
“Needs to get under $0.05 to be truly acceptable [in my opinion],” Vitalik Buterin said in a May 3 tweet. “But we’re definitely making great progress.”
Needs to get under $0.05 to be truly acceptable imo. But we're definitely making great progress, and even proto-danksharding may be enough to get us there for a while!
— vitalik.eth (@VitalikButerin) May 3, 2022
(As for the “proto-danksharding” comment in his tweet, let’s just leave it at it’s a technically complex way to reduce transaction sizes.)
It’s a number he’s suggested a couple of times in the past five years, but it comes at a particularly notable time for several reasons.
Most notably, it comes less than a week after Ethereum showcased its transaction fee problems when a massively popular metaverse-focused NFT minting sale sent fees far beyond all previous heights, reaching $4,000 to $10,000 per transaction on April 30.
See also: Bored Apes NFT Rampage Spikes Transaction Fees to $200M for 55,000 Sales
Ethereum’s normal rate is still far above that 5-cent mark, with the average “gas” fee running $1.50 to $5 over the last couple of months.
Beyond Scalability
Transaction fees are just as big a problem for crypto’s goal of becoming an alternative payments channel to fiat currency and traditional digital payments as scalability because being able to process as many transactions per second (TPS) as Visa — which can handle 65,000 TPS — doesn’t mean much if it all ends up costing a fortune.
The issue remains a big problem for smart contract platforms like Ethereum, on which the vast majority of decentralized finance (DeFi) — along with many other centralized projects — is built.
The 5-cent fee is something he first proposed in 2017 when he said “the internet of money should not cost more than 5 cents per transaction.”
Buterin referred back to that this January, saying that price “was the goal in 2017, and it’s still the goal now. It’s precisely why we’re spending so much time working on scalability.”
How to Get There
If Buterin’s $0.05 is an attempt to draw a line in the sand for crypto transaction fees, it’s worth noting that he wasn’t even talking about Ethereum.
Rather, he was referring to Layer-2 blockchains that piggyback another blockchain — or multiple blockchains — on top of Ethereum. These add a transaction layer on which the transaction takes place above Ethereum, only sending blocks of completed transactions down to be added to the blockchain.
They can be far faster and, as transactions are bundled into blocks before fees are assessed, much cheaper.
But are they cheap enough to save Ethereum?
When discussing alternatives to Ethereum, including the top half dozen or so “Ethereum killer” blockchains, scalability is generally mentioned before cost.
But not all pass Buterin’s financial test. Cardano, the No. 9 blockchain by market capitalization, runs 30 cents to 50 cents. But others, like Solana, are in the thousandths of a penny.
Buterin’s comment came in response to a tweet that showed off the fees on eight Layer 2 blockchains, with fees ranging up to 85 cents, with the two lowest at 2 cents and 12 cents.
Polygon is a major example of this. While it’s lumped into the competing smart contract blockchains collectively called “Ethereum killers” that’s something of a misnomer, its developers consider it more of an Ethereum savior. Its fees? Generally around a penny.
Read also: PYMNTS Blockchain Basics Series: What is Polygon? An Ethereum Killer Hedges Its Bets
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More