Adjusting Arbitrum’s Gas Fees

Don’t you consider Polygon a competitor ?
There the transaction cost is less than 1 cent

Arbitrum could lower transaction fees significantly in many ways at the cost of security, for example, by using a DAC or Celestia for DA. We believe one of the strongest incentives to build on and use Arbitrum One is that it inherits security from Ethereum to a high degree.

Thanks for the proposal @Entropy!

We are supportive of the increase in L2 minimum base fee. While we don’t think an increase to 0.05 will have a material impact on organic activity, maybe it would be fruitful for both the DAO and the working group for Milestone 2 if we start with an increase to 0.03 with the goal to raise it to 0.05 after a short period of time. This should hopefully provide some additional insight into the effects of raising the L2 min base fee.

Regarding Milestone 2, we’d be in favour of Option 2. But we do have concerns about the need for constantly fine-tuning these fees and the costs that will come from funding a specialised group. We would also like to see a veto mechanism incorporated / Guardian role just for additional safety in case of any errors when updating the L2 min base fee (oSnap could also be used here).

Lastly, one overlooked point regarding the elasticity of users is that the DAO is currently spending millions of ARB in incentives to incentivise activity on the chain, so even with an increase in the L2 min base fee the expected cost will still likely be negligible for most users.

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Thank you for proposing these adjustments to the gas fees, @Entropy. This is an area I have been concerned about since the Atlas upgrade. Increasing the gas to a minimum base fee of 0.03 and 0.05 still keeps the fees very low, so I don’t expect a significant impact on the user experience. However, I would like to understand more about how you arrived at these specific numbers. Is there a particular reason for choosing 0.03 and 0.05? What differences or benefits do these specific values provide compared to other potential options?

Additionally, we need to find the optimum point for the gas fee base to ensure long-term sustainability. I love the idea of having a working group to focus on this specific area and make adjustments based on market conditions.

Thanks to @Entropy for the proposal!

I’m glad to see suggestions in this area. I support raising the minimum base fee, as it will provide a more solid foundation for the subsequent arb economic model.

We have been made aware that per our request, risk member of the ARDC @chaoslabs is slated to look into this proposal and its implications. We will wait to proceed to Snapshot until after their analysis is complete and delegates have had time to digest it.

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At SEED, we believe this proposal is well-intentioned and holds potential benefits for the ecosystem. We think it is a good proposal, as it can help streamline various processes within the Arbitrum network. At the common user level, the proposed increase in gas fees is not particularly significant and should not pose a substantial burden.

However, the timing of this proposal appears suboptimal, since these last couple of months we spent a significant part of our treasury (eg. Catalyze Gaming Ecosystem), so these actions feel like covering a stab wound with a band-aid. It is essential to synchronize it with the Strategic Treasury Management proposal to ensure cohesive financial planning and execution. We consider it might be a good idea to align this proposal with the Arbitrum DAO Budget proposal that you guys also created.

We are also interested in understanding how this gas fee increase might impact builders who are currently deploying or those planning to deploy on Arbitrum. Assessing the potential impact on developers is essential to gauge the proposal’s broader implications.

In the event that both this proposal and the ARB Staking: Use Surplus Fees to Align Governance proposal are approved, 50% of the hypothetical fees will go to the ARB Staking initiative. Has this potential allocation been considered?

Overall, while we support the core idea of the proposal, we believe these considerations and alignments are crucial for its successful implementation. Thank you, @entropy, for putting this proposal together and for considering our feedback.

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Supporting this proposal is wise as it promptly addresses the immediate revenue decline by adjusting the L2 base fee while laying the groundwork for a flexible, long-term solution. This dual approach secures essential ETH inflow, sustains Arbitrum’s competitive edge, and ensures the DAO’s economic stability and adaptability in an ever-changing market environment. :+1:

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Thanks to Entropy for the offer!

The proposal discusses adjusting Arbitrum’s gas fees by increasing the base fee from 0.01 to 0.05. This change aims to boost the DAO’s revenue without significantly affecting user decisions due to the minimal cost difference. It also suggests collaborating with trusted service providers (SPs) for Milestone 2, including implementing KYC measures and possibly automating fee adjustments based on other L2 activities to enhance flexibility and efficiency.

Supporting

  • Increasing the base fee minimally impacts users but significantly benefits the DAO’s revenue.
  • Working with trusted SPs and implementing KYC measures ensures reliability and security.
  • Automating fee adjustments based on other L2 activities could enhance efficiency and flexibility.

I support the proposal due to its potential to increase the DAO’s revenue with minimal user impact and the inclusion of measures to ensure SP reliability and security. However, the feasibility of automation should be thoroughly assessed to ensure its practicality and efficiency.

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I support adjusting Arbitrum’s gas fees to increase DAO revenue. This change has a minimal impact on users but significantly improves resource utilization.

Suggestions:

  1. Technical Feasibility: Ensure the technical solution for automatic fee adjustments is viable and implement it promptly.

  2. User Feedback: Establish a feedback mechanism to continuously collect user opinions on fee adjustments for timely optimization.

I hope these suggestions help improve the proposal and ensure its successful implementation.

I don’t understand why everyone writes that this has minimal impact on users?
First:
You want to increase the cost of gas by 5 times. This will affect the cost of gas for users also by 5 times.
If you make 1 transaction per month, then of course this does not affect anything, but for active users it will be a rollback to previous indicators.

Secondly, we all voted to reduce the base fee to 0.01 , and in a couple of months we want to roll back. Why?

Third, if we vote for ARB staking, then I can still understand the benefits for ordinary users.
But what are the benefits of this increase now?
Just show that now making a small profit is a problem. What is it, what is this money intended for?

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As part of our efforts at the Pantera Research Lab and the Pantera Catalyze Research Fellowship, we’ve explored the potential impact of a fee adjustment.

Below are findings that may contribute to the discussion here:

  • A study from Pantera Catalyze fellow and UCLA PhD student Dongryeol Lee found that Arbitrum users are price elastic. This would argue against a price increase since it could drive away users. The net effect on revenue could even be negative despite the fee increase.
  • Lee’s study design uses pre-4844 data. Since 4844 was a big change and may have impacted elasticities*, the finding may not be decisive.
  • We conducted a follow up analysis and observed that price elasticity of demand is significantly lower post-4844. This means Arbitrum users are less elastic than Lee’s study suggests.
  • One possible tie-breaker is that current thinking suggests L2 markets are winner-take-most. If Arbitrum should be targeting market share and not revenue in the short run, this would argue against raising fees.

*e.g. shifting the supply curve to an equilibrium where elasticities are lower.

Why do we care about ‘demand elasticity’ and why is it hard to measure?

The elasticity of demand predicts how users respond to fee changes, like those being considered in this thread. Given how important elasticities are, it would be nice if it were simple to measure them. Unfortunately there’s a saying in economics that applies here: “Don’t reason from a price change.” Econ 101 tells you that prices and quantities are the result of supply and demand, so we look for cases where it’s plausible that there were unanticipated shifts in supply and then measure the resulting effect on demand.

The figure below explains this in the context of semiconductor production. To discover the elasticity of demand for semiconductors, the authors needed to find sudden unanticipated changes in supply. Using the supply chain disruption caused by Covid, they could then observe the slope of the demand curve and determine the elasticity.

Here is more of the nitty gritty of our analysis:

To address the challenges of estimating demand elasticities, Lee employed a Two-Stage Least Squares regression using the plausible exogeneity of L1 gas fees as an instrumental variable. In the first stage, Lee instrumented Arbitrum’s gas fees using L1 gas fees to predict transaction values based on L1 fee variation. In the second stage, he regressed Arbitrum gas usage on these predicted values, effectively isolating the variation in Arbitrum gas fees that is independent of user demand. Below is a table from Lee’s analysis, showing the estimates from the second stage of his regression:

In order to test how applicable this finding would be post-4844, we decided to test whether 4844 had a significant impact on elasticities themselves. In our subsequent analysis, using the sudden fee adjustment of EIP-4844 as a shock, we observed that Arbitrum users became less sensitive to fee fluctuations (decreased elasticity.) This indicates that post-4844 users are less elastic than in Lee’s analysis.

In conclusion:

Our strongest evidence suggests that a fee increase on Arbitrum would cause a decrease in user demand. This decrease could be large enough to offset the revenue from a fee increase.

However, that evidence relies on pre-4844 data and we are in a post-4844 world. A further analysis we conducted indicates that 4844 did make Arbitrum users less price sensitive. We also observe that there is a good argument against raising fees even on Arbitrum in general: that current thinking suggests L2 markets are winner-take-most. That is, if the goal is acquiring and retaining users in the short run, then it may be ideal to charge them as a little as possible.

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