The drop in Ethereum’s gas price could be a dangerous indicator of its price; this is why

Over the past year, Ethereum’s rising gas fee has been one of the biggest concerns of the cryptocurrency industry. Well, mainly because of Ethereum’s big role in DeFi and NFTs. Rising gas prices had inadvertently led to more congestion. So higher transaction time and costs. The Ethereum development team has been breaking necks on how to fix these issues. However, the gas price seems to be declining recently.

Source: bitinfo charts

In fact, Ethereum’s average network fee hit a six-month low this week. And is down nearly 80% from its recent high on January 10. At the time of writing, an average Ethereum trade cost 0.0046 ETH or $12.14, down from about $52 in early January.

Source: Glassnode

Consecutively, Ethereum’s median gas fee has also fallen more than 84% since early January. At the time of writing, it stood at 0.002 ETH or $5.3 per transfer, compared to the $29.92 quoted on January 10. Even though gas prices were low earlier on Feb. 28, it should be noted that levels remain much higher than around this time last year.

Also, a sharp drop in gas consumption was recently noted on February 15, which has since recovered. But it could provide an explanation for the drop in gas prices, as both indicators are directly proportional to each other.

Source: Glassnode

A decrease in gas consumption can itself be the result of lower transaction costs, but it can also be due to a decrease in the transactions themselves. The average number of transactions on Ethereum has been falling since late November. Well, on February 27, the Ethereum network undertook 1.12 million transactions.

Source: Glassnode

One reason for this could be the continued decline in DeFi usage. The total value locked in DeFi smart contracts has fallen to $68.9 billion, from $98.4 billion three months ago. Much of this is due to larger macro factors and the price drop that most cryptocurrencies have experienced lately.

Source: DeFi Pulse

However, another factor that could lower Ethereum’s gas consumption and fee is the rise of alternative blockchains. While a token swap on Ethereum cost $8.75 at the time of writing, the L2 Zero-Knowledge (zk) Rollup charged zkSync $0.22 for the same services.

Source: l2fees.info

In fact, zkSync 2.0 was recently launched on Ethereum’s public testnet, which is touted as the first EVM-compatible zk rollup. It can also communicate with smart contracts.

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