What are Gas fees in Crypto?

What are Gas fees in Crypto?

A gas fee is the transaction fee on the Ethereum blockchain network. In other blockchains, it is called a transaction fee or a miners fee. Because of the popularity of Ethereum, the term ‘gas fee’ has been generally adopted and used to denote the fees charged for carrying out transactions on a blockchain.

Why are Gas fees necessary?

The concept of gas fees was implemented to ensure the security of the Ethereum network. Gas fees keep the network secure by preventing spamming activities. It also prevents users from deliberately or accidentally deploying infinite loops, that is, codes that run indefinitely on the network using up valuable computational resources.

How do gas fees work?

Similar to how vehicles depend on gasoline to function, the Ethereum team describes gas, as the fuel that powers the Ethereum network.

All the transactions on the network require a large amount of computing power to execute and record. Gas is the fee required to successfully conduct transactions on Ethereum.

All operations on the Ethereum network have their associated costs. For example, Adding 2 numbers costs 3 Gas, getting an account balance costs 400 Gas and sending a transaction cost 2100 Gas. Gas fees are paid in Ethereum’s native cryptocurrency Ether (ETH).

How to calculate Gas fees

It is interesting to note that the gas cost does not indicate how much the transaction cost will be and to know how much you will be paying for a transaction, you may need to do the calculation by yourself. Don’t worry, if you hate maths, we will keep it simple for you.

Prior to the London upgrade of 2021, this was how it used to be.

Let’s assume that you need to send a friend 1Eth, and the associated cost of the transaction (aka Gas limit) is 21,000 Gas. The gas price is 100 gwei.

Note that the gas price is measured in Giga Wei or gwei, a smaller unit than ETH. A gwei is to ETH, what the cent is to the dollar or what a satoshi is to BTC.

1 gwei = 0.000000001 ETH

Instead of saying that one transaction costs 0.000000001 ETH, you can simply say that it cost 1 gwei.

Let’s continue with our example above, to get the transaction cost, we first need to multiply the gas limit or gas cost by the gas price.

21,000 * 100 = 2,100,000 gwei.

Then convert 2,100,000 gwei to Eth

Recall that 1 gwei = 0.000000001 ETH

Therefore 2,100,000 gwei = x

X = 2,100,000 gwei * 0.000000001 ETH

X =  0.0021 ETH

So, in total, you will be sending 1ETH + 0.0021ETH (1.0021ETH). This is the amount that will be debited from your account, while your friend receives 1ETH. The miners receive 0.0021 ETH.

To get the dollar amount equivalent to the transaction fee, simply multiply 0.0021ETH by the current price of Ethereum.

So, 0.0021 ETH * $1999 =  $4.19.

After the London upgrade, it has become easier to predict the cost of transactions using the formula 

Gas limit * (Base fee + Tip)

  • Where the Gas limit is still the cost of a transaction
  • The base fee is the minimum amount of gas required to include a transaction on the Ethereum blockchain. This is influenced by the demand and changes due to the number of users interacting with the network at any given time.
  • The tip or priority fee is the additional amount that you’re willing to pay for a faster transaction. Because the priority is given to the miners, they always prioritize transactions with higher tips.

So, with this new formula, let’s say that you want to send 2ETH to another friend, the base fee is 100 gwei, the gas limit is 21000 gas, and you want to include a tip of 10 gwei, this will be your total cost of the transaction;

21000 * (100 + 10) = 2,310,000 gwei or 0.00231 ETH.

2 ETH + 0.00231 ETH = 2.00231 ETH.

You will be debited a total of 2.00231 ETH, your friend receives 2 ETH, and the miner receives the tip of 0.00021 ETH. The base fee of 0.0021 ETH is burned.

So, why are gas fees so expensive?

Now you understand how gas fees are calculated, let’s learn why they can get so expensive.

There are 2 main reasons why gas fees are so expensive

  1. The growth of the Ethereum ecosystem caused the boom in DeFi and NFTs have attracted more users.
  2. Gas fees now cost so much because of the dynamic fee formula. Recall that gas fees are influenced by demand, as a result, the base fee fluctuates depending on the demand. Currently, there are about 3000 DApps running on the Ethereum network with over 100,000 daily active users and over 250,000 daily transactions. With this many users seeking to verify their transactions, gas fees have become expensive.

How to spend less on gas fees

While it may to totally possible to eliminate gas fees, here are some tips that help you spend less;

  1. Be patient and pick the right time by choosing a time when there are fewer people interacting with the blockchain
  2. Reduce your tip or priority fee for non-urgent transactions
  3. With the latest EIP 1559 upgrade, you can set a maximum gas limit on your transaction. This means that you tell the network the most amount that you are willing to pay for a transaction. After the transaction is completed, the network will refund the remaining amount that was not a part of your total gas fee.
  4. You can save money on gas by interacting with layer 2 scaling solutions like Arbitrum, Loopring and dYdX. These are solutions that process transactions separately from the main Ethereum blockchain and require less gas to complete and validate transactions.

We hope that now, you have a better understanding gas fees, what they are,

#Crypto #Gasfees #ETH #transactions
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