Botched Yuga Labs Otherside NFT Auction Reinforces Need for ETH Layer-2s

Admittedly, Yuga Labs is responsible for the Bored Ape Yacht Club, the hottest property in the world of non-fungible tokens, with last week’s auction being for NFTs usable with its much-awaited metaverse platform, the Otherside. Demand was therefore very high, yet if Ethereum is ever to become a widely used platform, it really needs to do better.

Fortunately, Ethereum will make the shift to a proof-of-stake consensus mechanism at some point in late summer. However, anyone hoping for it to instantly become much faster and cheaper will be sorely disappointed, with gas fees likely to remain relatively high for the foreseeable future. Because of this, layer-two solutions such as Polygon, Arbitrum and Loopring are likely to stay popular for a while yet, at least until Ethereum introduces sharding at some distant point in 2023.

Yuga Labs Otherside NFT Auction Shows Ethereum Is Still Too Slow and Expensive

It may easily be the biggest layer-one blockchain platform in terms of total value locked in, but the Yuga Labs Otherside NFT auction proved once again that Ethereum certainly isn’t the fastest or cheapest.

While some media outlets described the auction as causing Ethereum to ‘crash,’ this isn’t exactly what happened. The auction, which was for 55,000 NFTs representing virtual land in the Otherside metaverse platform, created a high level of competition among its bidders for being included in Ethereum blocks. While bidders had to bid in ApeCoin (APE), they also had to have ETH in order to pay Ethereum’s gas fees. And because Ethereum’s miners grant priority during times of high traffic to transactions that have the highest gas fees, many bidders set ridiculously high fees for themselves in order to ensure that their bids were processed before anyone else’s.

As a result, Ethereum witnessed fees in excess of $14,000, while fees of more than $3,000 were witnessed for other Ethereum transactions that didn’t have anything directly to do with the Otherside auction.

Source: Twitter

Making matters worse, many bidders experienced failed transactions, with around $180 million in fees being lost. Yuga Labs responded by offering to compensate anyone who had lost fees, with affected users being asked to wait for fees to be refunded directly back into their wallets.

Source: Twitter

This wasn’t the first time that Ethereum has experienced an embarrassing surge in fees and a spike in pending transactions. Going back to late 2017, the network was also cast in a negative light by the short-lived CryptoKitties fad, which saw Ethereum’s pending transaction count increase by six times.

Recent years have also witnessed other signs of Ethereum congestion, including the closure of an Ethereum-based casino in August 2021, the closure of a social media platform in February 2021, as well as migrations to rival chains such as Solana and Avalanche.

The Merge and Proof-of-Stake Won’t Help High Gas Fees

Such migrations are bad news for Ethereum, with its share of the overall DeFi sector (in terms of TVL) falling from 72% in April 2021 to 55% as of writing. For some people, this means that the planned ‘Merge’ with its new proof-of-stake consensus layer can’t come quickly enough.

That said, the shift to PoS is unlikely to have a big impact on gas fees immediately. First of all, this is because fees will still have to be paid to stakers (known as ‘validators’ in Ethereum-speak), who will continue to prioritize transactions according to what users are willing to bid in gas fees. Not only that, “gas space is limited per block” on Ethereum, meaning that higher gas fees will crowd out other transactions in any given block. As far as we’re aware, this isn’t something that will change with the upcoming Merge.

As such, the initial move to PoS may lower transaction fees on Ethereum only modestly, with issues continuing to arise until the network introduces ‘sharding.’ This is a technique which will see the Ethereum blockchain effectively split into parallel parts that process different transactions at the same time in order to increase throughput. It’s not due until the very vague deadline of ‘2023,’ and given Ethereum’s complexity and history of delays, it could end up arriving later.

This means that, if the Ethereum ecosystem wants to avoid another Otherside auction debacle, it will have to increasingly lean on layer-two solutions. Indeed, layer-two platforms such as Polygon began pitching themselves as the answer to Ethereum’s woes almost immediately after the auction, since they enable transactions to be processed at lower cost but still ultimately be settled on Ethereum.

Polygon, Arbitrum, Optimism Represent a Viable Solution

Ethereum-based layer-two solutions have been growing for several years now, with Polygon and Arbitrum accounting for $3.6 billion and $1.94 billion in total value locked in, respectively. Meanwhile, newer layer-two protocols such as Loopring and Optimism have been growing rapidly in the past few months, fuelled by growing dissatisfaction with high Ethereum fees.

While they can vary quite widely in their designs, layer-two solutions work by adding a platform that’s interoperable with Ethereum and that can process transactions more quickly off the Ethereum blockchain. Some (e.g. Polygon) are basically standalone blockchains that are Ethereum-compatible, while others (e.g. Loopring, Arbitrum) basically ‘rollup’ multiple transactions that are then sent back to the Ethereum blockchain as a single output to be processed.

The market caps of the leading layer-two native tokens have increased massively in the past couple of years, with Polygon’s token (MATIC) rising by over 500% since the beginning of 2021. And with sharding not likely to come to Ethereum until some point in 2023 at the very best, expect their market caps to continue rising for just a little while longer yet. This is the lesson Yuga Labs’ NFT auction teaches us.