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The DeFi Gas Fee Problem: Too Expensive to Use? Layer 2 and Scaling Solutions

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Alice: "Hello, Rabbit-senpai! I was so excited to explore the magical financial district called DeFi today, but... I've been stopped in my tracks by something strange!"

Rabbit-senpai: "Oh, Alice, what's the matter? You look like you've just run into a Cheshire Cat blocking the entrance to Wonderland."

Alice: "If it were a Cheshire Cat, that would be cute, but... whenever I try to do something in DeFi, the "}, {gas fees" are so high! I just wanted to make a small exchange, but it looks like the fees might end up costing more than the transaction itself, and I was so surprised I stopped right there. At this rate, I can't enjoy this magical financial district at all."

Rabbit-senpai: "Hmm, I see. Alice, you've run into one of the biggest challenges in the DeFi world: the "}, {gas fee problem". It's like trying to buy a magical item only to find that the travel cost to the shop is more expensive than the item itself. Alright, today I, Rabbit-senpai, will explain this gas fee problem and the rays of hope to solve it, "}, {Layer 2" and "}, {scalability solutions", in a way that's easy to understand! Once you grasp this, your DeFi adventures are sure to become much smoother and more fun!"

Alice: "Wow, really!? Please teach me, Rabbit-senpai!"


Why are they so high? The true identity of the gas fee monster plaguing DeFi

Alice: "Rabbit-senpai, first of all, what exactly are "}, {gas fees"? They aren't the same as the gasoline you put in at a gas station, right?"

Rabbit-senpai: "Hahaha, good question, Alice. They do have similar names, but they're a bit different from car gasoline. In the world of blockchains like Ethereum, when you perform a transaction or run a magical contract called a smart contract, the fee you pay to the network is called "}, {gas fees". It's just like needing magical fuel to make a magic carpet fly."

Alice: "Oh, magical fuel! But why do they get so expensive? When I looked, it seemed like it would cost thousands of yen just to make a small exchange!"

Rabbit-senpai: "Hmm, that's a problem that keeps many DeFi users up at night. There are several main reasons why gas fees skyrocket. Let me explain it simply."

The network is in a huge traffic jam! The mechanism behind soaring gas fees

Rabbit-senpai: "The first major cause is "}, {network congestion". The Ethereum blockchain is like a popular highway used by many people. As attractive services like DeFi and NFTs increase, the number of cars (transactions) wanting to use that highway grows, causing a massive traffic jam."

Alice: "A highway traffic jam... I suppose popular places do get crowded."

Rabbit-senpai: "Exactly. And the toll booths on the highway (the miners or validators who approve blocks) can only let a limited number of cars through at once. So, cars that want to pass quickly start saying, 'I'll pay a higher toll, let me go first!' This is like an auction mechanism for gas fees, and as a result, the fees keep getting driven up. This is also called the "}, {scalability problem"."

Alice: "I see! Because everyone wants to use it, the fees get high due to competition."

Rabbit-senpai: "That's right. The second reason is related to the "}, {rise in the price of Ethereum (ETH) itself". Since gas fees are paid in ETH, when the price of ETH goes up, the amount in Japanese yen becomes higher even for the same amount of gas."

Alice: "Oh, I see! So when the value of ETH goes up, the fuel cost effectively goes up too."

Rabbit-senpai: "The third reason is the "}, {limit of the blockchain's processing capacity". The Ethereum main network (also called Layer 1) has a limit on the number of transactions it can process per second. It's like having a fixed amount of cargo you can carry at once, no matter how hard you try."

Too expensive gas fees! The sad impact on users

Alice: "If gas fees are that high, what kind of impact does it have on us users?"

Rabbit-senpai: "Yes, the impact is significant. First, as Alice experienced, high transaction fees are the biggest problem. Especially for those who want to make small transactions, the fees can sometimes exceed the transaction amount, which is a major reason people hesitate to use DeFi. Even if you find a cute NFT for a few hundred yen, if the gas fee is several thousand yen, you'd give up on buying it, right?"

Alice: "Yes... I would give up... It's like an amusement park with a very high entrance fee."

Rabbit-senpai: "Exactly. Also, transaction delays are more likely to occur. When the network is congested, it can take a very long time for your transaction to be approved, or in the worst case, it might never be processed at all. If you can't get your hands on a magic item, your motivation for the adventure drops, doesn't it?"

Alice: "That's a problem! I want it right away!"

Rabbit-senpai: "Furthermore, there is the problem of the impracticality of microtransactions as well. For example, small transactions like buying minor in-game items every day or sending small tips are not realistic in the face of high gas fees."

Alice: "Hmm, the gas fee problem really is a huge wall in the DeFi adventure... Isn't there any solution, Rabbit-senpai?"

Rabbit-senpai: "Heh heh, of course there is! In the magical world, new magic to overcome difficulties is always being created. That is what I will talk about next: Layer 2 scaling solutions!"

A Savior Appears! What are Layer 2 Scaling Solutions?

Alice: "Layer 2...? What kind of magic is that?"

Rabbit-senpai: "Layer 2 is, you see, a Layer 1 (which we call Layer 1) to lighten the burden on the main blockchain so that many more transactions can be processed faster and cheaper. It's the idea of building a second-layer technology to create a more comfortable new road next to the main highway if it's congested!"

Alice: "Wow! A new road! Then we can move along smoothly!"

Rabbit-senpai: "That's right! Layer 2 processes some of the transactions outside the main blockchain (off-chain) and only records the final results on the main blockchain. By doing this, it reduces the burden on the main blockchain while creating many benefits."

The Magical Benefits Brought by Layer 2

Rabbit-senpai: "The main benefits of Layer 2 are like this."

  • Significant reduction in gas fees: Because many transactions are processed together, the gas fee each person pays becomes much cheaper.

  • Improved transaction speed: Because you can avoid the congestion of the main highway, transaction approval becomes very fast.

  • Improved scalability: It compensates for the limits of the main processing capacity, allowing for more transactions to be handled.

  • Maintaining security: In many cases, you can enjoy these benefits while still benefiting from the robust security of Ethereum itself.

Alice: "Wow, that's all good news! It's like a cheap, fast, and safe magical express train!"

Rabbit-senpai: "Yes, that's exactly the image. Now, let me introduce some representative types of Layer 2!"

Types of Layer 2 and Their Merry Friends

Rabbit-senpai: "There are various types of Layer 2, and each has different strengths and mechanisms. They are as unique as the inhabitants of Wonderland."

1. Rollups: Bundle transactions and zip them through!

Rabbit-senpai: "The technology currently receiving the most attention and becoming mainstream is called Rollups. This is a method where many transactions are executed outside the main blockchain, and the transaction data is bundled together (rolled up), compressed tightly, and recorded on the main blockchain. It's efficient because it carries many people at once, like a shared bus."

Alice: "A shared bus! That sounds like the fare per person would be cheaper!"

Rabbit-senpai: "Exactly! There are mainly two types of rollups."

  • Optimistic Rollups Rabbit-senpai: "This is a method that proceeds with processing by being optimistic, basically believing that 'everyone is honest and doing the right thing!' However, if someone commits fraud, there is a 'challenge period' set up to point it out and correct it." Alice: "Oh, it's like the presumption of innocence! But what happens if a bad person reports a lie?" Rabbit-senpai: "Good question. There is a mechanism (the fraud proof) where anyone can point out 'That transaction is suspicious!' during the challenge period. If fraud is proven, the transaction is canceled, and there is a penalty for the person who tried to commit fraud. Representative projects include Arbitrum and Optimism. Many famous DeFi projects use this technology to lower gas fees." Alice: "I see! So there are watchdogs too. That's a relief!" Rabbit-senpai: "However, a small point to note is that you may need to wait for this challenge period (usually about 7 days) when withdrawing funds to the main blockchain."

  • ZK Rollups (Zero-Knowledge Rollups) Rabbit-senpai: "This is a method that uses a very advanced cryptographic technology called zero-knowledge proof. It's like magic technology where you can say, 'I know this secret, but I will prove to you that I know it without showing the secret itself.'" Alice: "Oh! Zero-knowledge proof is the magic you mentioned before, where you only tell the other person that you know the secret password!" Rabbit-senpai: "Oh, Alice, you remembered well! That's impressive! ZK Rollups use this zero-knowledge proof to record only the 'proof' that many transactions were performed correctly on the main blockchain. Therefore, it doesn't need a challenge period like Optimistic Rollups, and it is said to be faster and theoretically achieve higher security. Representative projects include zkSync and StarkNet, and Polygon zkEVM. It is technically very complex, but it is expected to have top-tier potential." Alice: "It's amazing that you can trade safely and instantly with a magic certificate!"

2. Sidechains: Another independent path

Rabbit-senpai: "A sidechain is a separate blockchain that operates under its own rules (consensus algorithm), independent of the main blockchain like Ethereum. It is connected to the main blockchain by a bridge (two-way peg), allowing assets to be moved. It's like having another highway with its own operating policy, separate from the main highway." Alice: "Oh, that sounds convenient too! If the main one is crowded, I can just use that road." Rabbit-senpai: "That's right. A representative project is Polygon PoS. It's attractive because it's fast and has low gas fees, but since it has its own security model, it doesn't directly inherit the security of Ethereum itself, which is a bit different from Layer 2 rollups." Alice: "I see, I need to properly understand the benefits and points of caution."

3. State Channels: A secret passage for just the two of you

Rabbit-senpai: "A state channel is a technology that allows specific participants to create a dedicated transaction channel outside the main blockchain and repeat transactions there many times. It only records on the main blockchain when opening and closing the channel, and does not record the exchanges in between, so it is extremely fast and costs almost no fees." Alice: "Wow, that's like a secret shortcut you can only use with close friends!" Rabbit-senpai: "Yes, it's very effective for specific uses, such as exchanging items in a game or micropayments, where you interact frequently with the same person. However, it requires participants to deposit funds in advance, and it is not suitable for transactions with an unspecified number of people."

4. Plasma: A challenger from the past

Rabbit-senpai: "There is also a technology called Plasma, which was intended to connect many small child chains to the main blockchain and process transactions there. It was very promising for a while, but it had some issues, and recently, rollup technology has become more mainstream. However, today's technology is built on these various ideas."

Alice: "There are so many types of Layer 2! I'm confused about which one to use."

Rabbit-senpai: "That's true. Each technology has its strengths and challenges that still need to be solved, so DeFi projects choose the Layer 2 that suits their services. And it's important for us, as users, to know which Layer 2 the DeFi we use is utilizing."

Are there downsides to Layer 2? Points of caution

Alice: "Rabbit-senpai, it sounds like Layer 2 is all good, but is there anything I should be careful about?"

Rabbit-senpai: "Oh, Alice, you're sharp! Of course, Layer 2 is not omnipotent, and there are some challenges and points of caution."

  • New security risks: Some Layer 2 solutions may adopt security mechanisms different from Ethereum itself, so the possibility of new vulnerabilities lurking there is not zero.

  • Fragmentation of liquidity: There is also a concern that as many Layer 2s emerge, DeFi funds (liquidity) will be dispersed across each Layer 2, making it actually harder to use.

  • Complexity of user experience: Since operations like "bridges" to move funds between Layer 1 and Layer 2 are required, and wallet settings can become a bit more complex, there may be situations where beginners feel confused.

Alice: "Hmm, I suppose new technology always comes with new things to be careful about."

Rabbit-senpai: "That's right. But since brilliant developers around the world are working hard every day to solve these issues, I'm sure it will become easier and safer to use in the future."

The Ethereum mainnet is also evolving! The Layer 1 transformation plan

Alice: "I understand that Layer 2 is working hard, but isn't Ethereum itself doing anything about the gas fee problem?"

Rabbit-senpai: "Of course, the Ethereum mainnet isn't just watching idly! Ethereum itself is also planning and executing major updates to improve scalability."

EIP-4844 (Proto-Danksharding): Making Layer 2 even cheaper!

Rabbit-senpai: "What is receiving particular attention recently is an improvement proposal called EIP-4844, commonly known as Proto-Danksharding. This is one of the highlights of the major upgrade called 'Dencun' that took place in 2024."

Alice: "Proto-Danksharding... that sounds like a powerful name!"

Rabbit-senpai: "As the name suggests, powerful effects are expected. This is a mechanism to dramatically reduce the cost for Layer 2 rollups to record transaction data on the Ethereum mainnet."

Alice: "What!? Will Layer 2 gas fees become even cheaper?"

Rabbit-senpai: "That's right! Proto-Danksharding introduces a new type of data storage space called Blobs. These blobs are a clever mechanism that allows data to be used much more cheaply than previous methods, and because they are automatically deleted after a certain period (about a month), they don't put pressure on mainnet storage."

Alice: "Blobs... are they like fluffy, temporary clouds of data?"

Rabbit-senpai: "Yeah, that might be a good way to imagine it. Thanks to these blobs, the data costs that Layer 2 pays to the mainnet are significantly reduced, and as a result, the gas fees we users pay on Layer 2 are expected to become even cheaper. It's truly an update that acts as a tailwind for Layer 2."

Sharding: Splitting Ethereum to power up!

Rabbit-senpai: "And, the technology planned as the trump card for Ethereum's long-term scalability improvement is called Sharding."

Alice: "Sharding...? What kind of magic is that?"

Rabbit-senpai: "Sharding is a technology used in the database world. It's a method to increase overall processing capacity by splitting large data into several smaller parts (shards) and processing each in parallel. It's a grand plan to split the entire Ethereum network into many small shard chains, allowing each to process transactions simultaneously. The Proto-Danksharding I mentioned earlier can be said to be the first step toward realizing this full sharding."

Alice: "Wow, it's like Ethereum is using a shadow clone jutsu! If there are many Ethereums, it seems like it could process many more transactions!"

Rabbit-senpai: "That's right! Once sharding is fully realized, Ethereum's processing capacity is expected to improve dramatically, and the gas fee problem is expected to be significantly improved as well. It's a long road, but Ethereum is steadily continuing to evolve."

What does the future hold? The gas fee problem and the future of Layer 2

Alice: "Listening to you, Rabbit-senpai, gives me hope that the gas fee problem might be solved someday!"

Rabbit-senpai: "Indeed, that's right, Alice. With the spread of Layer 2 solutions and the evolution of Ethereum itself, it can be said that the DeFi gas fee problem is steadily heading toward improvement."

The spread of Layer 2 and expectations for EIP-4844

Rabbit-senpai: "Many DeFi projects and NFT marketplaces have already adopted Layer 2, and major cryptocurrency exchange Coinbase is also accelerating this movement by launching its own Layer 2 network, 'Base,' using Optimism's technology (OP Stack)."

Alice: "Even major exchanges are creating Layer 2s!"

Rabbit-senpai: "And with the introduction of EIP-4844 (proto-danksharding) that I mentioned earlier, gas fees for Layer 2 are expected to be reduced even further. Some experts even say that this will bring a 'broadband moment' for Ethereum—in other words, a dramatic improvement in convenience, just like when the internet changed from dial-up to broadband."

Alice: "A broadband moment! That sounds exciting!"

Future challenges: Bridging Layer 2s

Rabbit-senpai: "However, it's not all good news; there are challenges ahead. While it's great that many Layer 2s are appearing, if each Layer 2 becomes isolated, it could actually become harder to use. Therefore, increasing 'interoperability,' which allows assets to be easily moved and information to be exchanged between different Layer 2s, will be one of the major themes from here on out."

Alice: "Is it like having various Layer 2 islands and building bridges between each of them?"

Rabbit-senpai: "That's exactly what it's like. If it becomes easier to travel between each island, the world of DeFi will become even more convenient and vibrant."

Alice: "I see! I can't take my eyes off the evolution of DeFi and Layer 2 from now on!"

Rabbit-senpai: "That's right! Technology evolves so fast, so let's always catch the latest information and enjoy our DeFi adventures wisely!"

Rabbit-senpai's Quick Break Column: A strange incident caused by soaring gas fees? The day a sushi chef couldn't make sushi

Now, let me tell you a slightly funny story, Rabbit-senpai style. Soaring gas fees can sometimes create humorous (?) situations.

If I recall correctly, it was right in the middle of the 2021 DeFi bubble. There was a period when Ethereum gas fees had jumped to astronomical numbers. During that time, there was a bit of a stir, or maybe not, at a famous DeFi project called 'SushiSwap.'

SushiSwap is a decentralized exchange (DEX) where users can provide liquidity and swap tokens, but back then, gas fees were so high that whenever a user tried to trade (order sushi) on SushiSwap, the gas fee (delivery fee) would often end up being much higher than the price of the sushi itself.

"You're telling me that if I order a piece of tuna for a few hundred yen, the delivery fee is tens of thousands of yen!? That's ridiculous!" Those kinds of screams could be heard all over social media, or maybe they couldn't.

What's even more interesting is that proposing or voting on important changes related to SushiSwap's operations (like adding new menus or changing shop rules) also costs gas, of course. There were even rumors that when gas fees were too high, community members would say, 'I have a great new sushi idea, but the gas fee to propose it is so high that I can't...'—a situation like a skilled sushi chef who has the ingredients but can't open the shop because it's too expensive.

Of course, this includes some embellishment by Rabbit-senpai, but it is an undeniable fact that soaring gas fees had a major impact on DeFi usability and community activities. It could be said that it was precisely because of these 'incidents' that the importance of solutions like Layer 2 was increasingly recognized and development was accelerated.

In the world of DeFi, technical challenges sometimes appear before us in unexpected ways like this. But the wisdom and ingenuity used to overcome them create new evolutions. Interesting, isn't it?

Summary

Alice: 'Wow, Rabbit-senpai, thank you so much for today! I understand so well now why gas fees get so high, and that there are many solutions like Layer 2! I'm looking forward to the future, knowing that Ethereum itself is evolving with things like EIP-4844 and sharding! Now I feel like I can explore the DeFi financial district more freely!'

Rabbit-senpai: 'Hehe, Rabbit-senpai is very happy to hear you say that, Alice. That's right, the gas fee problem was a major challenge for DeFi, but it is steadily moving toward a solution through the power of technology. The important thing is to correctly understand new technology, grasp its merits and demerits, and use it wisely. The adventure in Wonderland continues, so let's use what we learned today to step into an even deeper world!'

Alice: 'Yes! I look forward to your continued guidance, Rabbit-senpai!'

Next Episode Preview

Alice's anxiety about the gas fee problem seems to have cleared up a little. However, in the magical financial district of DeFi, there are still many mysterious mechanisms and surprising items sleeping. Next time, Alice and Rabbit-senpai will approach the secrets of the magical vault where you can lend and borrow money without a bank, the 'lending protocol'! Is it true that deposited coins increase? What happens if you can't return borrowed coins? A heart-pounding adventure awaits!

'Next time, Alice and Rabbit-senpai's Cryptocurrency Wonderland Adventure Log: Let's Increase Money in the Magical Vault?' Stay tuned!

☕ Adventure Tips Corner ☕

Alice: 'Rabbit-senpai! Today's story was also super interesting! Somehow, after reading this article, I've started wanting to buy cryptocurrency!'

Rabbit-senpai: 'Whoa there, Alice, I understand that feeling well. But impatience is forbidden. This adventure log is just like a 'map' to understand the mechanisms of Wonderland. It's not a 'treasure map'.

Alice: 'Not a treasure map...?'

Rabbit-senpai: 'That's right. This is by no means investment advice telling you to 'buy coins here.' Investment is something you do based on your own judgment and responsibility, after studying well yourself, and within the range of money that won't cause trouble for your life even if you lose it. If you get that wrong, you'll get lost in Wonderland. I really want you to keep this promise.'

Alice: 'Yes, I understand! At my own responsibility, right! But I also got a little worried, thinking, what if the information in this article is wrong...'

Rabbit-senpai: 'You noticed a good point, Alice. This Rabbit-senpai also tries to deliver the most accurate information possible, but this world changes at the speed of light. Information might become outdated, or there might be misunderstandings. So, if any of the readers notice, 'Huh? This information might be a little off,' it would be very helpful if you could kindly let us know. We want to grow this adventure log into something even more wonderful together with everyone!'

Alice: 'It's an adventure log made by everyone! That's wonderful!'





Related Pages

Pages on DeFi in General and Financial Risks

  1. A Beginner's Guide to Decentralized Finance (DeFi) - (Coinbase)

  2. The Risks of DeFi: A Deep Dive into the Darker Side of Decentralized Finance - (Halborn)

  3. What are the Risks of DeFi? Explaining 6 Risks and Measures for Safe Use - (Coincheck)

  4. Decentralized Finance (DeFi): What It Is and How It Works - (Investopedia)

  5. DeFi Risks and Countermeasures: 6 Points for Safe Trading - (GMO Coin)

Page regarding oracle attacks and flash loan attacks

  1. What Is an Oracle Attack? - (Chainlink)

  2. What Are Flash Loan Attacks? - (Chainlink)

  3. Explaining the Most Common Flash Loan Attack Variants - (101 Blockchains)

  4. What is a DeFi Flash Loan Attack? Explaining the Mechanism and Past Cases - (CoinPost)

  5. What is an "Oracle Attack" Targeting DeFi? Explaining Its Mechanism and Countermeasures - (New Economy)

Page Regarding Smart Contract Vulnerabilities and Security Audits

  1. What Is a Smart Contract Audit? - (CertiK)

  2. Top 10 Smart Contract Vulnerabilities - (ConsenSys)

  3. What Are Smart Contract Vulnerabilities? Explaining Major Cases and Countermeasures - (techmedia-think.com)

  4. Security Best Practices for DeFi - (ConsenSys)

Other pages related to technology and risks

  1. What Is Impermanent Loss? - (Binance Academy)

  2. What is Impermanent Loss? [For Beginners] - (DeFi Llama)

  3. What Is a DAO? - (Ethereum.org)

  4. Do Your Own Research (DYOR): A Guide for Crypto Beginners - (CoinMarketCap)

  5. What Is Time-Weighted Average Price (TWAP)? - (Binance Academy)

  6. What is Arbitrage? Explaining the Mechanism in Crypto Assets (Virtual Currency) - (DMM Bitcoin)


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