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Ethereum Transaction Fees Stopping ETH From Keeping Pace Against Bitcoin, Solana?

Last Updated March 15, 2024 2:57 PM
Valdrin Tahiri
Last Updated March 15, 2024 2:57 PM

Key Takeaways

  • Ethereum transaction fees have soared, hindering user adoption.
  • Ethereum’s dominance in the market has been steadily down trending since September 2022.
  • Can Ethereum overcome its scalability challenges and reclaim its dominance in the crypto market?

Ethereum’s appeal has diminished due to soaring transaction fees, causing a resurgence of the Solana blockchain. Can Ethereum regain its market dominance amidst these challenges?

Indicators hint at a potential resurgence, but uncertainty remains. Will history repeat itself, or are we witnessing a paradigm shift in the crypto landscape, where Ethereum will lose its coveted spot as the largest altcoin?

What Makes Ethereum Less Appealing?

The main reason as to why Ethereum is losing is appeal lies at its significant transaction fees. Looking at the chart since 2021, it is clear that ETH transaction fees spiked significantly in September 2022. At the time, there were no major Ethereum upgrades  or forks.

Rather, the Muir Glacier fork went live in January 2020, while staking deposit contracts were introduced in the second half of October the same year.

Ethereum High Transaction Fees
Average ETH Transaction Fees. Credit: IntoTheBlock

After increasing to over 0.02 ETH per transaction in September 2020, ETH fees have been on a gradual downtrend. However, fees have hovered close to 0.01 ETH and have never returned to levels seen before the first half of 2020.

It is worth noting the spike in fees  is as a result of the increase in base fees rather than priority fees. When sending a transaction on the Ethereum network, you must pay a base fee  set by the protocol, and adding a priority fee (tip) incentivizes validators to include your transaction in the next block, with the priority fee being determined by network demand.

So, this increase has made transactions costlier for all users, not just the ones that attempt to send transactions in a hurry.

DeFI Interest Causes Transaction Fee Spike
Total Value Locked Uniswap: Credit – DeFiLlama

The spike in transaction fees coincided perfectly with the rising popularity of Uniswap, the first Decentralized Exchange (DEX) on Ethereum. From August to November 2020, the Total Value Locked (TVL) in Uniswap increased more than 15-fold, from $200 million to $3 billion.

As a result, it is logical to conclude that the increase in transaction fees occurred as a result of the rising popularity of Decentralized Finance (DeFi) on the Ethereum blockchain.

Total Value Locked for All Chains
Total Value Locked. Credit : DeFiLlama

Ethereum is definitely not the most popular blockchain for transactions. It has slightly more than 1 million transactions daily,  compared to more than 50 million for Solana . However, its security still stands out above the rest, making it the go-to blockchain for TVL.

In fact, more than half of all the TVL of cryptocurrencies is in Ethereum, while the second most popular blockchain is Tron with less than 10% of the total share, while Solana is fourth at 5.61%.

Can ETH Regain Dominance?

With that said, Ethereum’s dominance derived from its price has stalled in the current market cycle. The ETH price bottomed at $881 on June 2022 and the ETH dominance bottomed the same week at 16.51% (green circle).

The BTC price bottomed later in September 2022. Interestingly, this marked the ETH dominance top at 21.19%. The ETH dominance fell until January 2024 when it bounced at the 17% support level.

Despite this lack of strength, indicators suggest the bullish cycle will start soon. This is visible in the RSI but has not been confirmed by the MACD yet.

Ethereum Dominance Bullish Cycle Can Begin
Ethereum Dominance Weekly Chart: Credit – TradingView

The weekly RSI has generated bullish divergence (green line) after falling to oversold territory (green icon). This has only happened once before in ETH’s price history, in July 2019. This marked the absolute bottom before the ETH dominance started rising. It led to an increase of 220%.

Still, the upward movement did not accelerate until the MACD bounced into positive territory (red line). This has yet to occur in the current cycle and could mark the resurgence of ETH once it does.

Ethereum Resurgence Around the Corner

It is no secret that Ethereum transaction fees are a major problem for the Ethereum blockchain, though Ethereum is still the uncontested leader based on its TVL. The Ethereum Dominance has lagged this year, but indicator readings are similar to the beginning of the 2020 bullish cycle. It remains to be seen if history will repeat itself.

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