Author’s Note: This is part one of a two-part series. This article covers Ethereum congestion, USDt’s Omni-to-Ethereum migration, and the Pandemic Flash Crash. Part two will discuss what the launch and integration of USDt onto the OMG Network means for the Ethereum landscape.
Ethereum is the only public blockchain to achieve widespread success in nearly every category of decentralization to date, including DeFi, DEXes, games, gambling, social, data, marketplaces, and value transfers of ERC-20 tokens. The compounding effects of this success has spurred major applications moving away from other networks and onto Ethereum. Most notably, we’ve seen the largest stablecoin by market cap, USDt, move most of its liquidity from Omni to Ethereum.
Tether is a blockchain-enabled platform designed to facilitate the digital use of fiat currencies, such as USD (USDt), EUR (EURt), and Chinese Yuan (CNHt). Launched in 2014, USDt is the longest-running and the most widely used stablecoin with more than $9 billion in market cap.
It was initially developed on bitcoin using the Omni Layer protocol. However, as demands rose, USDt became a multi-blockchain asset. To date, USDt is available on several different protocols, such as Ethereum, TRON, Algorand, Liquid Network, and Bitcoin Cash to cater to the diverse and evolving needs of their users.
USDt, as an ERC20 token, is available to use in smart contracts or dApps on the Ethereum network, and can be sent to any Ethereum address with ease. Today, as per Bitfinex’s CTO, Paolo Ardoino, Tether transactions make up close to 24% of the total Ethereum network usage, while stablecoin-led peer-2-peer transfers as a whole make up 60%.
This single category of use has now become the largest consumer of gas. As a result, the Ethereum network consistently produces full blocks while reaching highly saturated network congestion levels. Over the last 10 days, the network congestion index reports that Ethereum regularly surpasses 92% (calculated as gas used / gas limit per block).
Source: PeckShield by Jeff Liu, OMG Network
A network congestion index of 92% means that 92% of blocks were full and unable to process additional transactions. A blockchain operating close to its maximum capacity is an exciting metric for adoption, but it is a concerning one when considering growth. Even a small increase in transaction volume has the potential to completely clog up the network and significantly limit usage. Unfortunately, these types of events are happening with increasing frequency, and they result in two primary consequences:
- Gas prices increase - it becomes significantly more expensive to process a transaction on the network.
- Network congestion occurs - as demand grows for the scarce resource (block space), proportionately more transactions are unprocessed, meaning not everybody can use Ethereum at the same time.
Gas Prices Increase
The chart below illustrates the daily average gas price on Ethereum from Jan 1st, 2020 to May 30th, 2020. Over this six month period, the average gas fee paid by users increased from a low of 0.066 USD to a high of 0.524 USD.
Unsurprisingly, this ~10x increase in gas price was a direct result of a daily increase in transactions. From Jan to May 2020, daily transaction volume increased nearly 2x, from 500k to almost 900k. As more on-chain activity occurred on Ethereum, users were forced to compete amongst one another, paying higher and higher gas fees to have their transactions prioritized by the network.
As gas prices rose, many users began feeling the negative effects of price sensitivity. One especially sensitive category of users were blockchain gamers. During this six month period between Jan and May, blockchain gamers decreased their daily transaction volume in direct correlation to the rate at which gas prices increased.
The consumer behavior was clear. Large swaths of the community opted not to use Ethereum as competition drove prices upwards. Gamers refused to pay expensive network fees to pay for their in-game micro-transactions. Meanwhile, modest USDt holders were willing to absorb the cost of soaring gas prices while they made their peer-to-peer payments and settled their OTC token exchanges.
Network Congestion Occurs
While gamers and other price-sensitive users simply opted-out of transacting on Ethereum during periods of high gas prices, this was not always true of other users. When more transactions are requested by users than the network can process, Ethereum is forced to deprioritize the lowest fee transactions to a pending pool. There are many examples of such network congestion in the last year (see each gas price spike on the chart below), but there are two worth studying more closely.
USDT Migration to Ethereum - Sept 2019
Pandemic Flash Crash - March 12th-13th, 2020
USDt Migration to Ethereum
On Sept 19th, 2019, USDt began its migration from Omni to Ethereum. At its peak, USDt transactions made up more than 50% of the network, which left more than 100,000 transactions pending confirmation.
Following the migration, USDt saw a significant growth on the Ethereum network. Among Ethereum-based stablecoins, USDt has approximately 77.8% of the total market share. Meanwhile, Tether-based transactions in total have surpassed any other ERC20 tokens by 10x.
Pandemic Flash Crash
The most recent spike in network activity occurred between March 12th-13th, 2020 following a declaration of a global pandemic. The market responded with massive selloffs, which took place concurrently across all exchanges. More than $10 billion was liquidated from Ethereum while DeFi collateral shrunk by 50%.
This was especially damaging for projects such as MakerDAO. The collateral collapse triggered an automated auction for approximately 1,200 MakerDAO user vaults. These auctions could not be properly bid on, or challenged, due to network congestion and so most funds were unintentionally sold for $0. While exchanges willingly paid 400% premiums, average users were sidelined watching their hopeless attempt to save funds take upwards of 44 minutes to process.
The current daily average gas fees have already surpassed the Sept 2019 USDt Migration event and are fast approaching the rates of the March 2020 Flash Crash. The trend is clear; demand is strong and growing, but the layer 1 network is choked which penalises users and limits growth. These are no longer rare black swan events, but all too frequent occurrences. This may be a strong reflection of the increasing collective uncertainty felt around current global affairs. We are in the midst of a global pandemic lockdown, unemployment rates have surged to all-time highs while equity markets still manage to boom, and governments are re-doubling their strategy to print more money as a means to try to stabilize the economy.
We believe open, decentralized networks will continue to thrive and grow during these unprecedented times, but only if we can solve the twin problems of high costs and low scale. Thats why we built the OMG network; the only production ready trust-less, non custodial scalability solution for Ethereum. In the next article we'll explore in more detail how we did that and our hopes for the continued growth of applications and services on both layer one and layer two.
Bowen Shen does Business Development at OMG Network.firstname.lastname@example.org