Understanding the Ethereum Gas Limit Debate

Due to a clogged network, Ethereum just got an expansion — but at what cost?

Increased activity on the Ethereum blockchain in mid-2020 caused a slowdown of the network, which in turn caused increasing transaction fees — and a slow, expensive network isn’t good for Ethereum’s growth.

The proposed solution was to increase the gas limit to 12,500,000 in order to cause more capacity, which was voted upon and passed by the mining community. But it's not just as simple as resetting the limit, because while it may play out well for some in the Ethereum community, it may mean the end for some node operators. Will this debate lead to a fork for Ethereum, like it did for Bitcoin?

The recent increase in activity has been due to the flourishing of DeFi, or decentralized finance, which are applications and services that run on the Ethereum blockchain. DeFi provides and facilitates a number of financial services, including decentralized exchanges, lending, smart contracts, tokenized deeds, and more. All of these transactions need to be added to the blockchain as well, which causes congestion.

The issue of a slow network stems from scaling, which is the current challenge for cryptocurrencies across the board. How can you increase transactions validated on a block when node operators start hitting the limits of their hardware? How can you keep the network from clogging when there's an increase in activity? How can you keep transaction fees from skyrocketing because of that slowdown?

A solution? Increase the gas limit per block. Gas, in the Ethereum ecosystem, is the measure of computational effort it takes to add a transaction to the blockchain, or perform a number of other actions or conditions associated with smart contracts and the like. The gas limit is how much gas can be spent per block. The increase takes the gas limit up to 12,500,000 from 10,000,000, and increases transactions per second from 35 to 44, allowing for less congestion and better throughput.

It sounds like a good way forward, right?

We've seen something like this before in cryptocurrency. This debate around increasing the gas limit is similar to the one Bitcoin faced in 2017 that led to its first contentious hard fork. The issue was around scalability as well, and the limits a block imposed on the speed and number of transactions.

The solution proposed was similar: increase the size of the blocks so that more transactions could be stored within. But the community disagreed on whether that was the right course of action. The disagreement resulted in Bitcoin’s first hard fork, or a splitting of the network, where Bitcoin Cash broke off from Bitcoin.

This debate over the Ethereum expansion feels similar. But unlike Bitcoin, where each node has to agree to change anything in the ecosystem, a move to increase the gas limit on Ethereum would only need to be voted on by the miners — which in and of itself has its advantages and drawbacks.

One of the biggest concerns in this debate is that miners have different incentives from those making the transactions. Miners like to mine, so the more transactions — and transaction fees and rewards collected — the better, and an increase in the gas limit would make that possible. The biggest benefit here is for the miners, and the miners are the ones voting on the increase.

Keeping up with the increase in transactions will require better hardware and more electricity on the part of the nodes. But the big players in mining have these resources already, so it's not a big issue for them to bulk up their equipment. If smaller players fall off because of it, that just means more opportunity for them.

But what about the smaller players? An increase in gas limit does prove a problem with individuals who may be running Ethereum nodes on smaller servers or from a location with poor connectivity, and who wouldn't be able to invest in more beefy equipment. Would they suddenly be out of the game?

Smaller miners may turn to pool mining, though there may be fewer pools due to the difficulty in running it. Additionally, if the increase in gas is not scaled safely, it could leave the ecosystem vulnerable to a Denial of Service attack, which has already plagued Ethereum's past. By focusing on transaction speed alone, this whole approach might overlook issues around stability and transparency.

Yet a benefit of the increase is that it'll give DeFi applications more room to grow. Decreasing transaction fees will make decentralized financial services like lending, borrowing, and trading, and other offerings like smart contracts, stablecoin use, deed transfers, and arbitrage opportunities, more easily accessible. Each transaction uses gas, so an increase would allow for more activity on Ethereum overall — which is a great thing.

Of course, members of the community were split over the proposal, arguing that while the high transaction fees have forced the community to take some kind of step forward, an increase in gas limit won't do much to truly scale the system.

What happens now? The miners did vote to increase the gas size, and it has scaled up to 12,500,000. So far, the Ethereum ecosystem is still healthy and stable, and the community is now looking forward to Ethereum 2.0. The upgrade will supposedly improve stability and scalability, and will also switch miners from a proof of work concept to a proof of stake concept.

Whatever the near future holds, Ethereum is on a steady upward trajectory, and is quickly gaining ground on the number one player in the space, Bitcoin