Tuesday, May 3, 2022

Fixed Supply, Variable Demand

BTC transaction fees
As I've been writing for a long time, because there is an auction for inclusion in the fixed supply of transactions, when no-one wants to transact they are cheap, but when everyone wants to transact they get very expensive. Vitalik Buterin is unhappy about this:
Buterin didn’t predict the rise of NFTs, and has watched the phenomenon with a mixture of interest and anxiety. ... their volume has overwhelmed the network, leading to a steep rise in congestion fees, in which, for instance, bidders trying to secure a rare NFT pay hundreds of dollars extra to make sure their transactions are expedited.
Last Saturday evening I looked at Molly White's invaluable timeline Web3 is going just great and saw that the top two entries summed up this problem to a tee. Below the fold, I explain

The top entry was entitled Popular NFT mint spikes Ethereum gas prices; OpenSea transaction fees exceed $3,500:
The much-awaited Bored Ape Yacht Club "Otherside" metaverse land sale began, and its popularity just about wrecked Ethereum for everyone else. Gas fees, which increase based on network congestion, spiked to shocking levels, with an average OpenSea sale costing more than 1.25 ETH ($3,500) in gas.

Most trading on OpenSea during this period was for the much-anticipated Otherside land deeds, which sell for around 5 ETH ($13,500) plus gas.
About a 26% transaction fee, which makes the "extortionate" fees credit cards charge look affordable.

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But it gets worse. There was
one person who bought a 0.1 ETH ($275) NFT and paid $3,850 in transaction fees.
A 1,400% transaction fee.

So Buterin is right that something needs to be done to make transactions cheaper. But wait! The second entry in White's timeline was entitled Solana goes down again:
On April 30, NFT minting bots began flooding the Solana network with 4 million transactions per second, causing the network to lose consensus. The project tweeted that "Engineers are still investigating why the network was unable to recover, and validator operators prepare for a restart." The network was offline for several hours.

This is hardly the first instability the network has demonstrated, much to the chagrin of its users. Transaction flooding is an issue on Solana in part because of the low transaction fees compared to networks like Bitcoin and Ethereum, which have relatively high gas fees that would make flooding extremely expensive.
As Solana has discovered, if transactions are very cheap, the network will be flooded with them and, as Solana did, collapse under the load. The cheap transactions effectively enable a DDoS attack on the network.

The motto of this story is "be careful what you wish for".

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