Crypto Fundamentals #70

🌞 Developments in the land of Ethereum Roll-ups

Ethereum rollups have taken center stage after Ethereum’s Dencun upgrade on March 13th introduced blob transactions, drastically lowering rollup fees.

Fees on Base spike, prompting an increase in the gas target

Gas fees on Base, Coinbase’s layer-2 rollup, spiked last week with certain transactions fees reaching pre-EIP4844 prices. In response to the spike in usage on the network, the Base team decided to increase the ‘gas target’. The gas target is a value that is indicates the network’s ideal gas usage per block, and is an essential component in calculating dynamic gas fees. If a block uses more gas than the target, fees in the next block will increase, and vice versa. Jesse Pollack, creator of Base, announced on X that reducing fees on Base was a top priority for the chain. Cheaper fees as a result of EIP4844 induced greater demand, driving gas usage above the gas target, leading to increased fees for end users.

As announced, Base increased the gas target by ~50% (blue line below) on Wednesday. Gas usage actually continued to trend upwards (purple line), but since now blocks were below the gas target, fees dropped drastically (yellow line). The Base team plans to continue increasing the gas target to about 400x in the long run in order to keep fees low as demand continues to increase. Readers may be wondering why Ethereum doesn’t simply increase the gas target on L1 to make Ethereum transactions cheaper. The main reason is that this would require increased hardware requirements for nodes, pricing out smaller validators and further increasing network centralization.

Fundamental metrics across Base have been on the rise since the introduction of EIP4844, relative to other rollups. While Base has not surpassed Arbitrum in TVL or Polygon in daily transactions, it has climbed up to second in both of those fundamental metrics. Base has been the rollup that has seen the most growth as a result of the upgrade. We can also observe that revenue spiked massively due to increased demand, but we should expect revenue to decrease as fees decrease as a result of the increased gas target.

Blobscriptions take over blobspace

Ethscriptions is a protocol inspired by Bitcoin ordinal inscriptions that allowed users to turn satoshis, bitcoin’s smallest denomination, into distinct digital assets. Ethscriptions allow users to attach information to Ethereum transactions in the form of call-data without the need to interact with a smart contract. They essentially function as cheaper NFTs and tokens.

While blobs are meant to be used by rollups, theoretically anyone that is willing to pay for them can use them. The folks developing Ethscriptions realized they can drive more value to their users by allowing them to add details to their Ethscription transactions in the form of blob data. Users can include things like image data. Blobscriptions went viral this week and had a stark impact on blob fee markets, which up to that point had had minimal price discovery. In the past couple of days blobscriptions have began to dominate the blob data market. Today they account for about half of all daily blobs posted, and have driven blocks to contain blobs ~70% of the time (up from ~20% prior to the advent of blobscriptions).

As a result, the market for blob gas skyrocketed, as the intended ~1 wei per blob gas spiking to 272.98 Gwei (1 Gwei = 1x10^9 wei). According to ultrasound.money data, the market has since stabilized around the 5-10 Gwei per blob gas range. Since the market for blob data had been relatively quiet (~80% of blocks didn’t even contain blobs) a true price for blob space had not been found as supply far outstripped demand. However, with the increased demand, the market is now undergoing a phase of price discovery, during which it is expected to adjust and eventually settle at a market clearing price — the price at which the quantity of blob gas demanded by buyers equals the quantity supplied by sellers.