Ethereum’s Double-Edged Sword: Will a Rising Price Hurt Users?

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CoinDesk |   | May 10, 2017

Ethereum supporters have every reason to be elated.

Not only has the value of the platform's ether tokens jumped by about 900% since the start of the year, but the public blockchain has recently attracted attention from banks and tech behemoths. And while ethereum supporters have long argued that the global computing platform would help to form a new kind of internet, a wave of innovators are now trying to deliver on that ideal.

The problem is that there might be downsides to this increase in price and increase in attention. Namely, as the price increases, ethereum apps grow more expensive to use.

That's because on ethereum, users need to pay directly for the computational power they use, whether to place a bid on a prediction market or use new kinds of decentralized Twitters and Ubers. For now, this is a different picture than, say, Facebook, the popularity of which rests in part on its 'free' platform.

Matus Lestan, co-founder of the ethereum app Ethlance, for example, recently posted a screenshot of a user looking to create a user profile on the platform – an action that cost 0.08 ETH, or $7. It would have cost "little more than $1" when ether was at $10, he wrote.

Given this increase, Luis Cuende, project lead at decentralized startup Aragon, told CoinDesk:

"[I]t's very understandable that some users may be pissed off."

The price of gas

Still, many ethereum apps, including Aragon, are in the test stage right now. So, it's unclear how many apps and users are actually impacted by this increase.

It might be more of a harbinger of future friction. Augur co-founder Joey Krug, for instance, said that users of his ethereum-based platform aren't being impacted.

"Since Augur is currently still in beta on testnet [the higher prices haven't] affected us directly yet," he said. "However, once it's live, it will indeed."

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Adding to the complexity, though, is that the prices are more dynamic than simply being affected by the cryptocurrency's increase in value.

The details are a bit thorny. First off, it's worth noting that 'gas', 'gas price' and 'gas cost' all mean different things. (Even ethereum's inventor has mixed up the terms.)

'Gas' describes units of computational power in ethereum, while 'gas cost' is used to denote how much gas is required to perform an action on the platform. A simple transaction costs 500 gas, while storing data using ethereum costs 100 gas.

These numbers are hardcoded into the software. Finally, the 'gas price' is how much each unit of gas costs in ether.

The total cost of an action on ethereum is the gas cost multiplied by the gas price. If the gas price stays the same while the value of ether increases, as has been the case so far, then the overall price of smart contracts increases.

In ethereum, miners set these gas prices. "Miners are the ones calling the shots," Jason Teutsch, founder of scalability project TrueBit Foundation, told CoinDesk.

Miner pressure

Some expect that miners will lower the gas prices. Their incentive to do so, one argument goes, is that if they don't, less people will use the network and pay transaction fees. So far, though, this hasn't happened.

The gas price sometimes fluctuates, according to a chart from ethereum data site Etherscan, but has stayed at roughly the 22 to 23 Gwei range (0.000000000000000022 ETH or less than 1 cent) for the past year.

"It's a bit of mystery to me why this quantity remains so stable. Perhaps it's an artifact of mining pool policies, but it might also reflect some average fixed cost perceived by miners," Teutsch said.

So, the situation could be mitigated if miners pushed down fees. Indeed, some users are currently campaigning mining pools to push down the gas prices.

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