Derivatives Trading on Alternative Blockchains Gain Traction As Ethereum Struggles With High Fees

Slow scaling of Ethereum

At the end of September of this year, the crypto community was troubled by the story of a person who bought 10 non-fungible tokens of TIME Magazine. According to Etherscan, the user paid a fee of 22.5 ETH (over $70,000 at the time of the transaction) to buy 1 ETH ($3,100 at the time of the purchase). Thousands of other users also paid fees greater than the value of the assets they acquired.

Why are Ethereum’s (ETH) fees so far beyond what is usually expected? Commissions on the Ethereum network increased significantly amid the altcoin’s price growth and the influx of new users. ETH, the price of which didn’t exceed $800 at the beginning of the year, is now trading near the $4,000 mark. The value of Gwei has grown accordingly, meaning that each transaction on the network has become more expensive.

This also means that a sender must set a sufficient gas fee to send their transaction, or it will take quite a long time for their order to be executed. In some cases, Ethereum users complain that their orders are not executed at all.

The situation has been aggravated by the Ethereum London hard fork update, which has deprived the miners of part of their income. Now they are trying to compensate for the lost profits with a surcharge for fast transactions, which are a weak side of the Ethereum blockchain, capable of processing no more than 30 transactions per second. For the platform that aspires to become a “World Computer,” this figure is surprisingly low. In comparison, the international payment system VISA can sustain a processing time of 25,000 transactions per second (TPS).

Ethereum’s current infrastructure is not sufficient to meet the demands of tens of millions of people. Since the DeFi-protocol and the Yield Farming boom, the network has become even more congested. This increases transaction costs, making Ethereum too expensive and too slow for the needs of decentralized applications and the DeFi apps and users. Such users place a high value on their ability to make many small and frequent trades.

Ethereum developers are trying to manage the difficulties of scaling. Still, Layer 2 solutions remain technically difficult. That is why, since the first protocol upgrade (Homestead, 2016), this blockchain has never come close to 1,000 TPS.

The users are faced with a choice — to put up with all the drawbacks of Ethereum and continue to trade derivatives on its blockchain, or switch to a highly scalable blockchain platform with a fast-growing ecosystem.

What are the alternatives?

One rival to Ethereum is the Binance Smart Chain (BSC), which is a fully functional blockchain that uses the Proof-of-Staked-Authority (PoSA) algorithm. It does not need a huge number of blockchain validators, which makes BSC a highly scalable system. Its TPS rate at maximum capacity can reach 160, which is several times higher than that of Ethereum. Because of advantages like this, the fastest-adapting players in the DeFi derivatives market no longer use Ethereum exclusively.

The emergence of more advanced blockchains encourages users to seek out new solutions. This applies not only to BSC. Tower BFT, together with the Proof of History (PoH) protocol, has allowed a young project — Solana (SOL) — to become one of the fastest-growing cryptocurrency ecosystems. Its algorithm already allows up to 50,000 transactions per second at the current level. This figure will only increase as computers become more powerful. The maximum capacity of Solana can reach 760,000 TPS, according to the platform developers.

Conclusions

The number of new DeFi projects grows with each passing year. The developers and users of crypto derivatives will not pay enormous fees when alternatives are available. Only highly scalable solutions can meet the growing demand for fast and cheap transactions. Crypto market players work hard to stay ahead of industry trends. They have come to use not only classic trading tools but also crypto derivatives. Properly applied, such contracts can both hedge risks and multiply profits.

The market has not yet produced many solutions which combine crypto derivatives trading with the benefits of advanced blockchains. However, innovative decentralized protocols have already begun to generate profits for their first users. Forward-thinking traders are willing to give up old protocols in exchange for the opportunity to work with powerful, high-bandwidth blockchains.