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Ethereum gas fees push small investors to the sidelines while whales profit

A closer look at wallets holding at least 20 ETH in 2020 shows a higher number of Ethereum transactions than those originating from smaller wallets, which also correlates with an increase in fees. Hypothetically, a $200 trade and a $20,000 trade on UniSwap could both cost about $50 in fees under current conditions. This, of course, makes smaller wallets less likely to complete transactions.

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High gas fees on the Ethereum network make it almost impossible for small investors to interact with DeFi protocols. However, those who benefit from this are the Whales or large investors.

Since the early 2020s, the decentralized financial sector has gained a lot of attention due to its groundbreaking innovations and the lucrative, high return opportunities offered to cryptocurrency holders.

Read how Ethereum gas fees push small investors to the sidelines and find other business news with the Born2Invest mobile app.

Ethereum gas prices rip holes in ETH wallets

Despite these features, the record-high gas fees on Ethereum this week show that the sector is still experiencing growing pains, and the lack of a proper Layer 2 solution could push smaller investors away from DeFi.

Investors trying to place a trade on UniSwap or simply approve a token on their favorite DeFi platform will have noticed the hole these actions have left in their ETH wallet.

Current Ethereum gas fees

Data from Etherscan shows that while gas prices are not as high as they were in 2020, they have increased noticeably since December of last year. This rise in gas fees also coincides with the rise in the Ethereum price.

Analysis of the different time zones shows that the cost of transactions that take place during the Asian trading session is comparable to those during the US trading session. That shows that fees are a factor of network usage and highlights the 24-hour nature of the cryptocurrency market.

Graph of average Ethereum fees per day in 2020

However, there is one group that has benefited from the sharp increase in network fees: Whales.

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Whales are claiming the DeFi playing field. A closer look at wallets holding at least 20 ETH in 2020 shows a higher number of Ethereum transactions than those originating from smaller wallets, which also correlates with an increase in fees.

Graph showing the number of transfers by wallet size in 2020

Since gas fees are calculated based on the cost of interacting with smart contracts rather than the size of the transaction, holders of large wallets are more likely to prioritize completing transactions on the Ethereum blockchain.

Hypothetically, a $200 trade and a $20,000 trade on UniSwap could both cost about $50 in fees under current conditions. This, of course, makes smaller wallets less likely to complete transactions. Indeed, in this numerical example, the cost of such a transaction would be 25% of the total value traded, rather than 0.25%.

So for the DeFi space to continue its explosive growth, it is necessary to solve the scaling problem on Ethereum. Fortunately, some projects and of course Ethereum itself are working on Layer 2 solutions. Some are even implementing them successfully already.

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(Featured image by WorldSpectrum via Pixabay)

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Olivia McCall is passionate about education, women and children’s rights, and the environment. A long-time investor, she covers news about the latest stocks (lately marijuana and tech), IPOs and indices, and is always on the lookout for socially responsible startups. She also writes about the food sector, and has a keen interest on cryptocurrencies.