Yuga Labs' foray into NFTs is being seen as a major blow to ethereum, and the consequences could see $2.5bn hole in the world's leading blockchain.
The Bored Apes NFT and apecoin creator caused a massive spike in transactions fees, called gas fees, on the ethereum network when they launched their Otherside metaverse land sale on 1 May.
In the sale a total of 55,000 virtual pieces of metaverse land were sold, at a flat price of 305 apecoin, a currency created by Yuga, which was worth about $7,000 at the time of the event.
The demand for Yuga Lab's latest NFT offering smothered the ethereum network causing gas fees to rise so high that one individual paid $44,000 in ether transaction fees to push through the sale of one piece of virtual land worth approximately $7,000.
Yuga Labs then released a statement shortly after the sale that further damaged ethereum's standing.
The company behind the Bored Ape NFTs, that have been bought by celebrities such as Jimmy Fallon and Paris Hilton, announced they would take their apecoin token off the Ethereum mainnet and onto its own native chain, in response to the transaction fee spike. This removal of apecoin could see $2.5bn leave the Ethereum ecosystem.
Yuga Labs move was a direct response to the high gas fees experience during the sale, they said and the reason behind Yuga Lab's move
The ethereum blockchain can only support around 30 transactions per second. So, when the scale of transactions increases a congestion of unsettled payments occurs. Gas fees are the additional price that users pay to the ethereum miners in order to prioritise their transactions.
So in a first come first serve buying frenzy such as the Yuga Labs Otherside metaverse sale, the amount of money paid to miners to push through sales sky rocketed.
The ethereum gas fee fiasco that ensued on May 1 was detrimental to the public's perception of the world's second-largest cryptocurrency.
There was also a knock-on effect felt by other users of the Ethereum network who were not involved in the NFT launch.
They also experienced excessive transaction fees, with one user reporting a $1,700 gas fee to send $100 from one wallet to another.
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The Otherside Metaverse land sale sold out within minutes, selling over $200 million in virtual real estate, with each plot of land costing 305 Apecoin, roughly $2.7k at the writing.
Individuals that were able to afford the excessive gas fees and managed to mint an Otherside NFT quickly enough were then flipping the virtual land deeds on the OpenSea NFT platform for over $15k, making a quick $10k in profit.
However, in line with the current downturn in the crypto-market many Otherside NFTs have now fallen below their original mint price.
The company described the event as “the largest NFT mint in history” and purchases were carried out in Apecoin, Yuga Lab's recently launched Ethereum-based cryptocurrency.
Crypto-analysts are in consensus that the spike in transaction fees during last Tuesday's NFT land sale was avoidable and speaking to Yahoo Finance Will Papper from Syndicate DAO said that it highlighted the need for seeing the event as a learning curve where "other forms of mint mechanised design need to be developed".
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But, the fall-out from the Yuga Labs event was not contained to the prized BAYC NFT brand alone, as the large amounts of money expended on gas fees brought to the attention of the wider public the long-running scalability problems associated with the ethereum network.
The event snatched $170m in gas fees from mostly small scale retail investors operating within the cryptocurrency ecosystem and handed it straight to ethereum miners who validate each transaction. A fact that jars with ethereum's ethos of being a decentralised, egalitarian and democratic ecosystem.
As a result, the costly process brought to light some uncomfortable home truths about the fundamental design of ethereum itself.
This inability of ethereum to keep transaction fees at an affordable level when experiencing large scale usage is at odds with what founder Vitalik Buterin once stated: “The internet of money should not cost 5 cents a transaction, it's kind of absurd".
However, ethereum is attempting to solve the persistent transaction fees issue with its Eth 2.0 upgrade, but the date of this keeps being pushed back.
Ethereum has decided to prioritise a move from a proof of work consensus mechanism to a less energy intensive proof of stake consensus mechanism at the expense of implementing sharding on its blockchain.
Sharding would dramatically improve the scaleability problems that the blockchain so visibly experienced during the Yuga Labs NFT launch.
The gas fee fiasco highlighted the benefits of rival and alternative blockchains, such as solana and cardano.
Solana's scalability ensures that all transactions remain under $0.01, and transaction speeds are as quick as 400 milliseconds per block. However, in line with 'the blockchain trilemma', it could be argued that Solana has sacrificed security in favour of its success in scalability.
Currently, ethereum can only process about 13 to 15 transactions per second and the average transaction fee in April was $42.
Another shot across ethereum's bow occurred shortly after the disastrous NFT sale, when Yuga Labs announced they would take their apecoin token off the ethereum mainnet and onto its own native chain, in response to the transaction fee spike.
This removal of apecoin could see $2.5bn leave the ethereum ecosystem.
Yuga Labs, which has also acquired the CryptoPunks and Meebits NFT collections, apologised for the episode, but the tone of their response came across as patronising and disingenuous, causing fury from the legion of retail investors who lost so much in ethereum gas fees and felt the hit from apecoin's rapid depreciation after the event.
Investors had to buy apecoin in order to purchase the virtual land in the NFT launch.
After the event, Yuga Labs tweeted: "We're sorry for turning off the lights on ethereum for a while.
"It seems abundantly clear that apeCoin will need to migrate to its own chain in order to properly scale.
"We'd like to encourage the DAO to start thinking in this direction."
We're sorry for turning off the lights on Ethereum for a while. It seems abundantly clear that ApeCoin will need to migrate to its own chain in order to properly scale. We'd like to encourage the DAO to start thinking in this direction.
— Yuga Labs (@yugalabs) May 1, 2022
Referring to the speculation that Yuga Labs will create their own blockchain, former Wall Street banker Brian Rose spoke to Yahoo Finance and said: “The recent NFT minting by Bored Ape Yacht Club’s Yuga Labs, the largest in history, crashed the ethereum network and shows that it’s only a matter of time before apecoin will migrate to its own chain to properly scale."
The CEO of the London Real youtube channel, who will soon debate crypto with 'Real Wolf of Wall Street' Jordan Belfort, added: “When the public sees these ridiculous gas fees for a simple NFT mint then it forces ethereum to innovate faster.
“It also highlights to the public that other protocols are already offering much higher speeds and lower transaction costs like Solana, AVAX & Tezos. And that there is big money and utility in providing alternative solutions.”
It is easy to take a cynical view of the events of last Tuesday, where privileged holders of overpriced pictures of cartoon apes received free land in a virtual multiplayer game. But, the rest of this virtual land was put out for sale to the public, which caused a frantic FOMO bottleneck of desperate buyers who were forced to pay more and more in ethereum gas fees to speed up their transactions.
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The cynic would point to the details of last Tuesday's NFT launch, which saw some individuals paying as high as $44k in transaction fees to buy pixelated 3d images costing $500 within what is essentially a multiplayer computer game. This economic exchange would defy everyday common sense.
This could easily lead to conclusions that Yuga Labs' NFT land sale was the high water mark in a period of mass hypnosis that could never last.
The Otherside NFT land sale could be the critical moment when the whole NFT house of cards begins to fall.
Or, we could look back and see that those early buyers into Yuga Labs' metaverse were ahead of the curve and they had invested in an ecosystem that we may all at some point in the future have to migrate into.
Yahoo Finance contacted Yuga Labs and Ethereum for a reply to the gas fees issue and the plan to move apecoin to its own blockchain, but they have yet to respond to the request.
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