Ethereum (CCC:ETH-USD) is facing what Decrypt magazine called an “existential crisis.” Major supporters are now starting to turn against the cryptocurrency due to its high transaction fees and transaction completion times.
Decrypt magazine went so far as to call it a “war,” due to its stubbornly high gas fees (transaction fees) and its usability.
The article quoted a Singapore-based billionaire named Su Zhu who runs a firm called Three Arrows Capital. He was quoted on Twitter (NYSE:TWTR) as having bashed Ethereum in very colorful language for its excessive fees.
He also said that he “abandoned Ethereum despite supporting it in the past.” He felt that Ethereum had “abandoned its users” and that “everyone is already far too rich to remember what they originally set out to do.”
However, an article in Cointelegraph indicated that he later “backtracked” on his earlier statements. He later took back the term “abandoned.”
ETH 2.0 project, a proof-of-stake validation method, (known as Level 2) is the answer around this, he said. The problem is that Level 2 is still not in force right now.
Other Companies Raising Their Fees
Recently BlockFi raised its fees for users that stake their Ethereum tokens with the Defi (decentralized finance) firm. Decrypt magazine wrote that this was because the firm was facing high gas fees that it could no longer cover without passing on to Ethereum users.
To put it bluntly, Decrypt magazine said that it is not just Three Arrows Capital founder Su Zhu who thinks Ethereum fees are “out of control.” According to Decrypt: “Crypto companies are changing their pricing to avoid losses on ETH.”
BlockFi is raising the fees as of Dec. 1, not just on Ethereum, but also other cryptos that run on top of Ethereum. This includes transactions involving Chainlink (CCC:LINK-USD), Pax Gold (CCC:PAXG-USD), Uniswap (CCC:UNI-USD) and Basic Attention Token (CCC:BAT-USD).
BlockFi users used to be able to make one free withdrawal without the fees. But starting Dec. 1 the fee will be 0.155 ETH, which at today’s price of $4,313 per ETH token, works out to $64.70 per transaction. That means for a typical $1,000 transaction the fee works out to 6.47%. That, to say the least, is a very high fee.
This reinforces what the article says about the average transaction in Ethereum costing at least $50 per transaction, depending on the day.
Where This Leaves Ethereum
This means that the concern over the high transaction fees has reached the level of action by crypto companies. Some are no longer willing to absorb high gas fees for withdrawals of Ethereum tokens or related cryptos.
But it also highlights two other things. First, Ethereum really needs to move to its Layer 2 platform in order to lower transaction fees. Based on present timelines that will happen sometime in the first half of 2022, but there is no guarantee it will happen then.
The second implication is that Ethereum’s competitor cryptos, like Solana (CCC:SOL-USD), are becoming more attractive to investors and developers. If Ethereum takes too long to lower its transaction fees and transaction times, the “war” will escalate with its competitors and users.
In the meantime, expect to see more companies like BlockFi cutting back on their “free” transactions. They will not be able to cover the higher transaction fees such as over 6% per $1,000 in Ethereum transactions. This amounts to a very high marketing cost that most start-up Defi app companies can’t fund.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.