Gas fees could be Ethereum's kryptonite

Competing platforms are using Ethereum's high gas fees against it.

| More on:
Virtual gas rigs.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Gas fees -- or the fees paid to process and validate transactions in a crypto ecosystem -- have become a huge problem for the Ethereum (CRYPTO: ETH) blockchain. What was once an annoyance is now a very real cost, with transactions costing $100 or more just for simple acqusitions. 

Gas fees for the proof-of-work blockchain are a standard feature, but for Ethereum they're starting to drive developers and users to other cryptocurrencies. Until a transition to a proof-of-stake transaction process is completed in 2022, gas fees will be high and Ethereum doesn't have a great answer to cryptocurrencies offering lower fees and faster transaction times. And these alternative cryptocurrencies are Ethereum's biggest competition. 

Gas as a leading indicator

The high cost of gas fees earlier this year was initially a positive sign for Ethereum. It meant there was so much demand on the blockchain that miners could charge high fees to complete transactions. High fees are correlated with high demand, and more demand on a crypto blockchain is a good thing, or so it would seem. 

The problem is that high-enough gas fees will push projects to lower-cost networks. Non-fungible token (NFT) projects are booming on Solana (CRYPTO: SOL) as a result of lower transaction costs and an improving suite of tools for developers. High-value NFTs are still on Ethereum, but a project selling an NFT for $100 would make little sense on Ethereum today due to gas fees potentially costing as much as the NFT itself. 

This brings us to the problem for Ethereum ahead of a proof-of-stake upgrade. The price of gas is high, but if the price of gas falls, it would likely be an indicator that transaction volume is down because users are moving transactions elsewhere. You can see below that transaction volume is actually flat over the past six months, despite more people getting involved in crypto. For perspective, Coinbase (NASDAQ: COIN) said that its number of monthly transacting users has jumped nearly 4x in the last year from 2.1 million to 7.4 million in the third quarter of 2021.

Ethereum Average Gas Price Chart

Ethereum average gas price data by YCharts.

This is a Catch-22 for Ethereum. If gas fees are high, it's an indication of high demand, but if gas fees go down, it could indicate that crypto developers and users have moved elsewhere, taking their demand with them. 

The developer challenge

I don't think there will be one cryptocurrency to rule them all, long term. Some projects will live on one blockchain while others will live on another. But Ethereum had a clear advantage over upstarts like Solana and Cardano (CRYPTO: ADA) as recently as this summer, and now smaller cryptocurrencies are catching up. 

If developers move their projects to a different crypto blockchain, it will undermine the value of Ethereum. As someone who has bought NFTs on Ethereum and Solana, I would prefer a Solana project over an Ethereum project in a heartbeat. The longer that gas fees are high, the more people will agree with that assessment. 

Crypto's utility moment

At a time when more and more people are coming on board with cryptocurrency and NFTs, and other projects are finding real utility in the market, Ethereum is facing transaction costs that are untenable in the long term. That's an indication of high demand on the network, but it also means that competitors will be selling themselves as lower-cost blockchains, and that's a compelling feature for those new to cryptocurrency today. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

Travis Hoium owns Ethereum and Solana. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

A woman looks questioning as she puts a coin into a piggy bank.
International Stock News

Is Warren Buffett's Berkshire Hathaway the smartest investment you can make today?

So, with all the uncertainty, is Berkshire Hathaway the smartest investment you can make today?

Read more »

Warren Buffet
International Stock News

7 ways Warren Buffett changed my investing approach

I'm a big fan of Warren Buffett, and have been for many years.

Read more »

iPhone with the logo and the word Google spelt multiple times in the background.
International Stock News

Down 12% this year, should you buy Alphabet stock?

The Google owner is underperforming the Nasdaq Composite, which has rallied in recent weeks.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
International Stock News

Missed out on Apple in 2012? Buying Nvidia stock today could be your second chance

By now, it's clear that artificial intelligence (AI) is the next major technology platform.

Read more »

Robot humanoid using artificial intelligence on a laptop.
International Stock News

3 reasons Amazon stock looks like an incredible bargain right now

Here are three reasons Amazon stock looks like a rare bargain at current levels.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
International Stock News

Warren Buffett's $347 billion warning to Wall Street is ringing out loud and clear. History says this happens next.

Let's take a look.

Read more »

Warren Buffet
International Stock News

Warren Buffett nearly made his biggest investment since 2022. Here's what's holding him back.

Buffett said Berkshire came close to spending $10 billion, and he'd happily spend $100 billion.

Read more »

Happy man working on his laptop.
International Stock News

Here's why Amazon is a brilliant buy now (Hint: It's not e-commerce)

Fortunately for investors, cloud computing is going through a massive boom.

Read more »