Transaction costs on the Ethereum blockchain have skyrocketed and no one will let you forget this. Reports often detail how decentralized financial platforms are the reason for the constant increase in gas fees – tokens paid to miners who validate and enable transactions on the Ethereum blockchain. Yes, DeFi matters, but the problem is institutional.
Some exchanges, custodians, and asset managers use multi-signature platforms to secure their digital assets. A few years ago, multisig was seen as a well-respected attempt to prevent private keys from being hacked. Despite the initial introduction, several shortcomings have led organizations to question the multisig approach and turn away from the multisig approach. In many cases it has been replaced by an MPC (multi-party account) infrastructure.
With many disadvantages, multisig platforms are not supported locally on the Ethereum blockchain. Instead, organizations need to run smart contracts that implement multisig-i logic. H- A smart contract that accepts deposits and requires multiple signatures to withdraw them.
Creating these multi-functional smart contracts to secure client funds comes with millions of dollars in gas fees. But it wasn’t just people’s wallets that suffered. Since fees are in Ether (ETH), a congested network can slow down the development of Ethereum-based projects.
Multifunctional gas economy
Creating a multisig wallet executed as a smart contract costs over 1 million gas units (around $ 30 in current value). In addition, each deposit or withdrawal costs more than 100,000 gas units. Therefore, multi-tasking organizations end up paying higher fees because they have opted for the smart contract functionality.
Unlike creating an MPC wallet with a single signature, there are no fees and deposits to create portfolios, and withdrawals cost 21,000 units of gas by default.
Given that end-users pay gas storage fees, any smart contract enforcement organization can initially assume that this wallet set-up fee is just a one-time process. Unfortunately, there’s another big problem with multisig addresses on the Ethereum network that leads to another unnecessary fee: mapping.
If an organization like an exchange wants to identify deposits from different users, it creates a unique receiving address for each customer.
Unlike the Bitcoin network and other blockchains, Ethereum does not allow a transaction to have multiple entries. So, organizations instead forward all deposits from each customer’s unique receiving address to a secure address where withdrawals are made.
A common solution to obtaining addresses for institutes is to use a shipping contract or direct incoming funds to a new location (Omnibus multisig wallet). While this leads to assignment, another smart contract must also be executed.
Construction of a shipment contract will cost approximately 200,000 gas units; Shipping contract deposit costs are approx. 60 thousand gas units. These are all unnecessary costs that add to the load of the Ethereum blockchain.
Suppose a new crypto switch center tries to set up its Ethereum wallet infrastructure with a separate receiving address for each customer. Based on the above rates, if the exchange uses a multi-signal infrastructure, it will pay $ 6 each time it registers a new customer and creates a new receiving address for it. This is before the customer deposits any money.
The exchange will likely take this into account as part of the costs of acquiring customers or the cost of doing business (if they are aware of these costs incurred).
According to a recent report, Coinbase has 35 million customers. At today’s prices, building a multitasking infrastructure to support these customers will cost $ 245 million, regardless of whether or not those clients transact.
Solution to the problem
As in any mature market, organizations have seen an increase in fee pressure over time, and companies have sought to find ways to scale their businesses at a lower cost without compromising security.