The transaction costs in the Ethereum Blockchain are at record levels, and no one will let you forget it. Reports often detail how DeFi platforms are the cause of steadily increasing gas commissions: tokens being paid to miners who confirm and enable transactions in the Ethereum Blockchain. Yes, DeFi plays a role, but the problem is institutional.
Some exchanges, custodians and asset managers have been using multiple signature platforms (multisig) to secure their digital assets. Several years ago, multisig was considered a respected attempt to prevent private keys from being compromised. Despite the initial adoption, numerous shortcomings have caused institutions to question the multisig approach and move away from it, replacing it in many cases with a multiparty computing infrastructure, or MPC for short.
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Among many disadvantages, multisig platforms are not natively supported in the Ethereum Blockchain. Instead, institutions that execute intelligent contracts are required to apply the logic of multi-sig, ie an intelligent contract that accepts deposits and requires multiple signatures to withdraw from it.
Creating these smart multi-sig contracts to secure exchange customer funds involves gas fees, which cost millions of dollars. But it’s not just people’s wallets that have been suffering. Because the fees are denominated in Ether (ETH), a more congested network can lead to slower development of Ether-based projects.
Multisig’s Gas Economy
The creation of a multi-sig portfolio implemented as a smart contract costs more than 1 million gas units (approximately $30 at current value). In addition, each deposit or withdrawal costs more than 100,000 gas units. Therefore, institutions that use multisig therefore end up paying a higher rate, since they have chosen to use a smart contract feature.
In contrast to the creation of a single-signature MPC portfolio, there are no fees for portfolio creation and deposits, and withdrawals cost an average of 21,000 gas units.
Since gas deposit fees are paid by end users, any institution implementing a smart contract may initially think that this portfolio creation fee is simply a one-time operation. Unfortunately, there is still another major problem with multi-sig addresses in the Ethereum network that results in another unnecessary rate: attribution.
When an institution such as an exchange wants to identify the deposits of 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 include multiple entries. Therefore, institutions will instead forward all deposits from each customer’s unique receiving address to a secure address where withdrawals are made.
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The usual solution for institutions to receive addresses is to use a forwarding contract or a way of forwarding incoming funds to a new location (a multi-signature bus wallet). While this achieves attribution, it is also one more smart contract that must be implemented.
The creation of a forwarding contract costs about 200,000 gas units; the deposit of the forwarding contract costs about 60,000 gas units. These are all unnecessary costs, which further congests the Ethereum Blockchain.