Ethereum is the major blockchain when it comes to tokens, tokenization, and also DeFi projects. However, the increase in popularity comes with its costs. The more users and projects are relying on Ethereum, the scarcer the resources. Ethereum is still very limited to transactions per second. No more than about 12 transactions per second. These 12 transactions are distributed between all entities globally.
To visual that, let’s take a view of the average fee per transaction over the last five years:
You can clearly see the three spikes. The first one occurred in late 2017 with the success of ICO. Initial Coin Offerings was (and still is) the activity to issue newly created tokens on Ethereum and to sell them to the community. Ideally, this sparks the project behind the tokens to be successful. Hundreds of ICO were done in summer 2017 – per week.
The second spike was shortly after in summer 2018 with the launch of Cryptokitties. The card game was revolutionary. It allows players to create, trade, and collect cards with different kitties and every one with its own design and attributes. Every trade was reflected in Ethereum. Well, it’s kind of obvious that if several thousand players try to trade cards on an infrastructure that it is only able to manage about 12 transactions per second – globally. As the hype around Cryptokitties declined, the fees decreased as well.
The third, and current spike in late 2020, is rooted in the rise of DeFi. Decentralized Finance promises to enable people to take their finance into their hands without any middleman. Staking and lending are some of the buzzwords.
As long as Ethereum has such limitations, spikes like the past three will occur again. This might change with the upgrade to Ethereum 2.0 which aims to manage several thousand transactions per second.
However, it’s fully unclear when this upgrade will be released. We at Tangany don’t expect to see full 2.0 before 2023. This is why we, together with our partners, have identified alternatives to reduce network fees.
Omnibus Wallet Architecture
It’s common best practice to use one wallet per user. For one, this reflects the original idea of blockchain the best and secondly, there are (nearly) unlimited numbers of wallets available.
This is also the approach we and our partners see with most. Exceptions are exchanges (for the same reasons) that are using the omnibus wallet since the beginning.
An omnibus wallet architecture means that instead of using one wallet per user, to switch to a centralized form. Only one or a couple of wallets are being used for all users. With that, transactions are no longer done on-chain but off-chain. If an asset is to be allocated to another user, this record will not be on the blockchain. Therefore, zero transaction fees.
The tricky part is to have a powerful off-chain ledger in place. And with that, we don’t mean a .csv file. This ledger could be something like a private blockchain (we generally recommend Quorum for that purpose). On this private blockchain, every user will have it’s own wallet again. These wallets will mirror all the assets.
So, if a user wants to know his balance in the omnibus wallet, we only have to take a look at his non-disclosed private blockchain wallet. So if a transaction should be done it will only be executed on the private blockchain.
As the private blockchain comes with zero transaction fees and higher scalability, there are no restrictions. It is even possible to implement an explorer for transparency reasons if required.
That leads to reduced transaction fees of 100%. Such an architecture can also be used for other blockchains like Bitcoin, Tezos, or EOS.
From a legal point of view, this is doable within the European Union as it was validated by Tangany. This includes cryptocurrencies, stable coins, and security tokens.
Migration to another blockchain
Depending on the business case, migration to another blockchain could be reasonable. If the project hasn’t officially started yet even better.
No matter if migrated or directly started on another blockchain, leaving Ethereum comes with its pros and cons. The pros are often higher scalability and with that way lower transaction fees. We are speaking here up to 99% lower.
However, we have to consider also the cons. The most important one is for sure that Ethereum is some kind of market leader for tokens. Leaving the platform might make it harder to get the token supported on 3rd party services like exchanges. Additionally, Ethereum is quite well-known, tested and validated for 5 years.
Similar alternatives to Ethereum are EOS, Binance Chain and Tezos. Those three blockchains support smart contracts, have often a similar technical architecture and are also considered to be reliable. At Binance and Tezos it’s even possible to re-use the same wallets as on Ethereum.
The migration can be done quite easily. All tokens need to be redeployed on the new blockchain. If the same wallet can be used, the tokens will be distributed automatically. If a new wallet is required (because the blockchain uses another cryptography), those are generated first before the tokens are distributed accordingly.
Efficient Smart Contracts
Another, less radical approach compared to the ones before, is to optimize the smart contract. The higher the complexity of the smart contract, the higher the fees. That is why a smart contract should be as simple and small as possible. Remove all unneeded functions and check if the code can be simplified. Maybe even validate whether some functions could be done outside of the smart contract such as the management of a whitelist.
With that we have seen decreased network fees by 33%.
Optimized Gas Estimation
For every transaction, there is the possibility to set the amount of fee. Depending on the urgency of the transaction, the included fee can be reduced. The less fee is included, the longer it takes until the transaction is executed.
As the fee level is very volatile it is recommended to recheck the current market price for transactions. By not using outdated market prices it is possible to save about 25% of the fees per transaction.
Another benefit by using the latest market price is that transactions can be timed. This means, the approximately time until the transaction is executed can be estimated. By using a Gas fee which is 25% below the market price, it will take slightly longer. By 25% above it will be faster.
That optimization can easily be done with Tangany Custody Suite and our powerful API which comes with an in-built solution for that.
No matter what activities are done on Ethereum, the limitation of scalability will still be part of that for quite some years. Avoiding high Ethereum transaction fees is always a good project to tackle.
Tangany has accumulated a lot of experience with that in the past years and our API is able to provide out-of-the-box solutions in most cases.