Transaction costs for the Ethereum blockchain are at record levels and no one will let you forget this. Reports typically detail how DeFi platforms are the cause of the steady rise in gas commissions – tokens paid to miners that confirm and enable transactions on the Ethereum blockchain. Yes, DeFi does matter, but the problem is institutional.
Some exchanges, custodians, and asset managers use multi-signature (multisig) platforms to secure their digital assets. A few years ago, Multisig was seen as a respected attempt to prevent compromise of private keys. Despite its initial adoption, numerous shortcomings have resulted in institutions questioning and moving away from the multisig approach, in many cases replacing it with a multi-party computing infrastructure, or MPC for the acronym in English.
With many disadvantages, Multisig platforms are not natively supported on the Ethereum blockchain. Instead, Institutions entering into smart contracts must use the logic of Multisig, that is, a smart contract that accepts deposits and requires multiple signatures to withdraw.
Creating these multisig smart contracts to secure customer funds comes with gas fees that cost millions of dollars. But it wasn’t just people’s wallets that suffered. Since the commissions are in Ether (ETH), a more congested network can lead to slower development of Ether-based projects.
Multisig’s gas industry
Building a multisig portfolio implemented as a smart contract costs more than 1 million gas units (around USD 30 at current value). In addition, each deposit or withdrawal costs more than 100,000 gas units. Hence, institutions using Multisig pay a higher fee because they have chosen to use a smart contract feature.
In contrast to building an MPC portfolio with just one company, there are no fees for deposit and portfolio creation, and withdrawals cost an average of 21,000 gas units.
Since the fees for gas depots are paid by the end-users, any institution implementing a smart contract may initially think that this fee for portfolio building is just a one-time operation. Unfortunately, there is another major problem with multisig addresses on the Ethereum network that leads to another unnecessary charge: assignment.
If an institution like an exchange wants to identify the deposits of different users, it creates a unique receiving address for each customer.
In contrast to the Bitcoin network and other blockchains Ethereum does not allow a transaction to contain multiple entries. Therefore, the institutions instead forward all deposits from the unique receiving address of each customer to a secure address where withdrawals are made.
The common solution for institutions to get addresses is to use a freight forwarding agreement or to route incoming funds to a new location (a multisig binder). While this leads to an attribution, another smart contract must also be implemented.
Signing a shipping contract costs around 200,000 units of gas; The down payment for the shipment contract costs around 60,000 units of gas. These are all unnecessary costs that continue to overload the Ethereum blockchain.
Suppose a new cryptocurrency exchange tries to set up its Ethereum wallet infrastructure with a separate receiving address for each client. Based on the price above, if the exchange used multisig infrastructure, it would pay $ 6 every time a new customer signs up and creates a new receiving address for them. This is before the customer deposits any money.
The exchange will likely consider this as part of their customer acquisition costs or the cost of doing business (if they are aware of those costs that are incurred initially).
According to a recent report, Coinbase has 35 million customers. At current prices, building a multisig infrastructure to support such customers would cost $ 245 million, whether or not those customers choose to transact.
A solution for the problem
As in any mature market, institutions have experienced greater interest rate compression over time and companies have sought ways to grow their business at lower cost without compromising security.
If institutions could reevaluate their underlying infrastructure and consider a solution that is not supported by a single blockchain, they could easily cut costs and cap infrastructure setup fees. Gas fee payments that merely reflect Ethereum’s multisig infrastructure are a thing of the past.
Using alternative systems would go a long way in reducing congestion on the second largest blockchain.
The viewpoints, thoughts, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.