Can crypto's high 'gas' prices be reduced?

The cost to process cryptocurrency transactions is on the rise, creating an added barrier to mainstream use of digital assets by small businesses and consumers. 

The culprit has a name that should be familiar to any consumer who feels pain at the pump — "gas fees" — but otherwise has nothing to do with fuel (although the use of energy for crypto mining could also raise costs). It's a term that refers to the fee users pay to cryptocurrency networks to help manage parts of the transaction, such as validating users and payment processing.

It's an issue that's on a collision course with two other bits of industry jargon: Web3 and decentralized finance, or DeFi. Web3 typically refers to the use of blockchains or distributed ledgers to develop and access products, rather than keep them centrally managed; DeFi similarly involves the use of distributed ledgers and is normally associated with cryptocurrency, though it is playing a larger role in financial services. Banks are using DeFi to make early moves into the metaverse or to combine traditional finance with blockchain services, or "hybrid banking." 

The goal is to prevent the sort of outages that can affect wide swaths of the internet that rely on a single host. But as the internet and online banking move to a distributed model through either of these models, gas fees become a bigger problem. 

"One of the major issues facing the Web3 economy is how to minimize gas fees," said Elbruz Yilmaz, senior vice president of crypto and web3 at the payment technology company Paysafe.  

To address gas fees, technology firms are using a form of bundling or combining transactions in batches. 

The Sydney, Australia-based fintech Canvas, for example, recently launched Canvas Connect in collaboration with StarkWare, a company that sells technology that supports distributed finance transactions. Canvas Connect uses STARKProofs, a system that verifies DeFi transactions, to pool a group of blockchain transactions. This wider distribution of payments would reduce or eliminate the gas fees, in theory allowing more people and smaller firms to access or develop DeFi apps. 

 "We liken our service to commercial airlines," said David Lavecky, CEO and co-founder of Canvas. "Prior to their existence, passengers had to charter a very expensive private flight. Now commercial airlines can transport many passengers to the same destination with each paying a reasonably priced fare." 

And both fintechs and banks are developing use cases to support cryptocurrency for payments and incentive marketing.  Payment companies such as PayPal and Block offer cryptocurrency trading, potentially creating a large group of users with crypto balances on hand to use.  Block, formerly Square, has an entire division dedicated to bitcoin called TBA and gets a large portion of its revenue from cryptocurrency trading.  

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Gas fees could make distributed apps too expensive for smaller users, who will turn to less efficient choices such as centralized applications or non-blockchain options, according to Yilmaz. 

The process of verifying each transaction takes a lot of computing power, said Yilmaz, adding that the Ethereum network uses gas fees to fund validator services. 

These gas fees are paid in fractions of the cryptocurrency Ether, with the price determined by supply and demand at the time of the transaction. The Ethereum network's capacity and congestion also play a role in the fees, with the gas fees getting higher as overall transaction volume increases. 

Gas fees were relatively low for many years, but have been on the rise over the past two years. The increase in gas fees is partly due to the high amount of trading that has taken place as the price of cryptocurrencies rose quickly in 2021, then fell rapidly during the first part of 2022. 

Most DeFi applications run on the Ethereum blockchain, which has garnered most of the attention for higher gas fees. Ethereum's gas fees have been volatile in 2022, recently spiking 80% in three days, according to Bitcoin.com. The Ethereum organization did not provide comment for this article. 

"While several strategies can be deployed to lower and mitigate gas expenses, most of these involve either building a different layer-1 [more basic] blockchain or making Ethereum better," Yilmaz said

Options to reduce gas include what's called a Layer-2 blockchain solution, or a distinct network that operates on top of a blockchain to improve efficiency. Beyond Canvas, which uses Layer-2 technology, other Layer-2 sources include Arbitrum, Optimism, Polygon and Loopring. 

Layer-2 also supports meta transactions, which allow different users to transact in a public blockchain without transaction fees, Yilmaz said. 

"Web3 will very likely only be successful in increasing adoption or even replacing Web 2.0 completely when users are able to interact without the high burden of gas fees," Yilmaz said.

Another challenge for financial institutions in utilizing public blockchains is to maintain privacy for their sensitive data, Lavecky said, adding transactions performed on Ethereum and other public blockchains can be viewed by all users, which makes them less desirable for financial institutions. Canvas uses an outside party to independently verify transactions, which means transaction data is not exposed, Lavecky contends. 

Removing gas cost unlocks a range of new use cases for DeFi apps, Lavecky said, adding a simple example of a use case is a round-up savings plan accessible through a DeFi or crypto app. "With gas costs removed, it is possible to perform transactions of any dollar amount. Small or micro transactions that are currently uneconomical would be possible."