What are Gas Fees?
If you’ve just conducted a transaction on the Ethereum blockchain, you must be aware of what gas is in cryptocurrency, also known as gas fees. If you’re wondering what gas fees are and why gas fees are sometimes so costly, we have got you covered. Today, we’ll go through the fundamentals of gas fees – what gas is in cryptocurrency, how they’re determined, and what the future of Ethereum-based transactions looks like.
The amount of gas fees for blockchains like Ethereum varies according to the magnitude of network congestion. This implies that the gas fees on blockchain will increase as more people use the network. And because the ethos of Web3 is built around democratization and inclusivity, this basic scaling problem largely calls those guiding principles into question.
Individuals must pay gas fees on blockchain to conduct a blockchain transaction on the Ethereum network. These fees reimburse blockchain miners for the processing power they expend confirming transactions on the blockchain. Usually, they receive payment in the native cryptocurrency of the blockchain, in this case, Ether. While paying for gas is a must for blockchain transactions (you can’t do them without it), the gas price is extremely volatile and depends on various variables.
Block time and transaction throughput are the key components for each blockchain, determining how quickly new blocks are generated (how many transactions a single block can process). In general, there will be less competition for block space if the blocks are generated faster. If that’s the case, the more transactions they can carry, the lower the gas fees will be. All network users benefit from lower transaction fees as a result.
How are Gas Fees Calculated?
Source: Ethereum Yellow Paper | Cost in gas per instruction on the Ethereum network
We must first comprehend the idea of gwei in order to grasp how gas fees are calculated. The cost of gas is measured in gwei, a very tiny unit of Ether (1 gwei = 0.000000001 ETH). For instance, a gas fee of 30 gwei would be equal to 0.000000030 ETH.
Post the London hard fork of Ethereum that happened in August 2021, Ethereum gas fees calculations have changed a bit. Here’s how gas fees are calculated on the Ethereum network:
Gas units (limit) x (Base fee + Tip) equals the total gas fee.
Let’s dissect this a little more.
An Ethereum user’s gas limit is the most they are willing to spend in gas (or energy) to complete a blockchain transaction. Most wallets and platforms set the gas limit for a standard Ethereum transaction at 21,000 gwei, and the network also allows users to manually alter this value at any time. Users frequently raise their gas limits dramatically during gas wars, in which numerous users compete to control the priority of a transaction in the following block.
Nevertheless, the Ethereum network will only consume the precise amount of gas required to complete the transaction. Your wallet will be credited with any excess between your gas cap and the actual quantity of gwei required. Setting your gas limit too low, on the other hand, will probably result in a transaction failure and wasted gas payments that you’ll never be able to recover.
The base fee comes next. Each block now has a base cost that changes based on the network congestion level, which was also added as part of the London upgrade. Each base fee is burned or removed from Ethereum’s supply circulation as a part of its deflationary mechanism to counteract the issue of new ETH. Users are therefore urged to include a priority charge (tip) with each transaction to make up for the money miners would have previously received.
Here is an example of a basic gas fee calculation keeping everything in mind. Consider Charles’ request to mint an NFT for 1 ETH.
1. There is a 21,000 unit gas cap, a 50 gwei base price, and a 15 gwei tip for Charles.
2. The formula for calculating gas is 21,000 (the gas limit) x (50 (the base price) + 15 (the tip)), or 21,000 x (50 + 15). This results from a total gas fee of 1,365,000 gwei, or 0.001365 ETH.
3. Charles will debit 1.001365 ETH from his wallet for minting the NFT. One Ethereum will be transferred to the NFT project wallet, while 0.000315 Ethereum will be paid to the miner as a tip, and 0.00105 Ethereum will be destroyed as the base fee.
Users have complete control over the maximum fee they’d like to pay, including the basic and priority fees, by setting a maximum fee for the transaction.
However, although this strategy improves price predictability, congestion-based pricing remains a problem. The Ethereum team, led by Vitalik Buterin, is busily developing a new, scalable version of Ethereum, which seeks to solve the issue of congestion-based pricing.
Making Gas Fees on Blockchain Affordable
The Ethereum 2.0 upgrade or Merge will take place in September 2022, the Ethereum team finally revealed in an announcement after repeated delays. The proof-of-stake consensus model will replace the proof-of-work consensus in Ethereum 2.0, which is intended to increase scalability, security, and efficiency.
This will greatly increase transaction throughput (Ethereum 1.0 can process about 30 transactions per second, whereas Ethereum 2.0 claims to complete 100,000 per second), and it will greatly cut gas costs by lowering the computational power required for each transaction. Users have been relying heavily on Layer 2 protocols in place of the much-anticipated upgrade to enable faster and less expensive transactions.
What is the Layer 2 Protocol?
In order to increase transaction throughput and lower gas fees, blockchains like Layer 2 protocols (L2), alternative scaling frameworks, are built on top of already-existing Layer 1 blockchains such as Ethereum. Sidechains and rollups are the two Layer 2s that are most widely used and trusted by users to avoid high gas fees during peak times on the Ethereum network.
A side chain is an independent blockchain network linked to a parent blockchain by a two-way bridge. Sidechains enable secure token transfers back and forth between blockchains through smart contracts. Although sidechains are linked to the main blockchain (mainnet), they run on their own consensus methods.
For instance, In addition to lengthening block times and dramatically lowering gas costs for Bitcoin, sidechains like Rootstock (RSK) also enhance the blockchain’s functionality. The RSK blockchain expands the use cases for Bitcoin by giving the network scalability smart contract capabilities.
Users familiar with Ethereum frequently utilize Polygon as a rapid, affordable, and scalable substitute which is a layer-2 scaling protocol built over Ethereum. Polygon, unlike Ethereum, runs on a proof-of-stake consensus, allowing for faster transactions, higher transaction throughput, and lower gas fees. Additionally, gas is paid in MATIC, the native currency of Polygon, which is much more affordable than ETH and results in payments of pennies rather than hundreds of dollars.
In light of this, DeFi and bulk-NFT trading have chosen Polygon as their preferred blockchain. Despite all the benefits, it’s vital to remember that sidechains, like Polygon, have their own unique set of problems with downtime and security.
Rollups are scalability solutions that group together (or rollup) several blockchain transactions at once, storing the transaction information on the primary blockchain (on-chain) while carrying out the actual transaction on a different chain (off-chain). Rollups also offer higher throughput and cheaper gas costs depending on off-chain execution while validating the transactions on-chain. There are two primary categories of rollups at this time: optimistic rollups and zero-knowledge proofs (ZK proofs). Although each method has benefits and drawbacks, they demonstrate great promise.
You ought to now have a solid understanding of what is gas in cryptocurrency and how gas fees are calculated. Gas fees will never go away completely, and there is still plenty to be observed from the launch of ETH 2.0.
Why do Gas Fees Exist?
In essence, gas fees contribute to the safety of the Ethereum network. A price is imposed on each computation performed to stop malicious users from spamming the network. Each transaction is needed to limit how many computational steps of code execution it can use to prevent unintentional or malicious infinite loops or other computational waste. “Gas” is the basic unit of computing.
Even if a transaction has a limit, any gas fees not utilized in the transaction are given back to the user (i.e., the maximum fee minus the basic fee plus the tip).
What is Gas Limit?
The term “gas limit” describes the most gas you will ever use in one transaction. Smart contract transactions that are more intricate demand more computing labor, necessitating a higher gas cap than a direct payment. The typical gas limit for an ETH transaction is 21,000 units.
For instance, if you set a 50,000 gas cap for a straightforward ETH transfer, the EVM would use 21,000 of that cap before returning the remaining 29,000 to you. The EVM will use your 21,000 gas units in an attempt to complete the transaction, but it will fail if you set a gas limit that is too low, like 20,000 for a straightforward ETH transfer. The EVM then undoes any modifications, but because the miner has already expended 20,000 gas fees, blockchain has used that gas already.
Why can Gas Fees get so High?
The popularity of Ethereum is to blame for the high gas fees. Any activity on Ethereum requires the use of gas, and the amount of gas available per block is restricted. Calculations, data storage or manipulation, or token transfers are all subject to fees and require varying amounts of “gas” units. The Ethereum blockchain has experienced a recent surge in popularity. It is used to mint NFTs, enable smart contracts in DeFi, and conduct Ether transfers. Additionally, all ERC-20 coins supported by the Ethereum blockchain, including Chainlink and USD Coin, clog the network.
Gas is used during every Ethereum activity. The gas model is an auction-based system where customers can outbid one another to speed up transaction completion. Because it is more profitable, miners are encouraged to choose transactions with the highest gas prices first. According to the laws of supply and demand, gas prices increase as Ethereum’s network becomes a host to a greater number of dApps, NFTs, and users.
However, it should be noted that the cost of a particular transaction is not determined by the gas price alone. We must multiply the amount of gas consumed by the transaction charge, which is expressed in gwei, in order to determine the transaction fee.
Initiatives to Reduce Gas Costs
Once Ethereum undergoes its Merge upgrade, the platform will be able to execute thousands of transactions per second and scale globally once the scalability improvements have resolved some of the gas pricing difficulties. Currently, the main attempt to significantly reduce gas costs, enhance user experience, and increase scalability on the Ethereum network is layer 2 scaling solutions. Post the upgrade, Ethereum developers are working toward introducing sharding, whereby large datasets are broken into smaller manageable parts, which help boost performance and scalability.
Strategies to Reduce Gas Costs
You can set a tip to denote the priority level of your transaction if you want to save money on gas for your ETH transaction. Because miners get to retain the tips you pay, they are likelier to “work on” and complete transactions that give a larger tip per gas. They are less likely to complete transactions with lower tip settings.
There is no doubt that a few other chains could gain a sizable number of users and volume due to the high transaction costs issues Ethereum was facing recently. However, it’s difficult to predict how much of this will be a short-term play and how much will be a longer-term user acquisition at this stage. It is important to remember that not all of these chains are completely decentralized and permissionless, and Ethereum will continue to remain a forerunner in the decentralization race with its upgrades promising to make the network more economical and energy-efficient.
Frequently Asked Questions (FAQs)
1. What are Gas Fees?
Gas is the payment made to miners for supplying the processing power needed for each transaction to be processed on the Ethereum blockchain. Gas fees also contribute to the safety of the Ethereum network. Every transaction should have a cost attached to avoid spamming or unintentional infinite loops.
2. How are Gas Fees Calculated?
You should use 21,000 units of gas if the transaction is straightforward, such as transmitting ETH or an ERC-721 token to another address. Go to the contract you want to work with and start looking through the transactions that have been made. Following EIP-1559, a transaction creator’s overall charge is computed as follows: (base fee + priority fee) x units of gas utilized.
3. Who Gets Gas Fees?
The Ethereum network is supported and protected by those who receive gas fees. Gas fee payouts go to Proof-of-Work (PoW) miners on the Ethereum protocol on the execution layer of Ethereum (formerly known as Ethereum 1.0). Gas fees are allocated to individuals staking ETH to support this revised Proof-of-Stake (PoS) variant of Ethereum on the consensus layer of Ethereum (formerly known as Ethereum 2.0). The two layers of Ethereum will merge during the Merge event scheduled in September this year.
4. Why is it called Gas Fees?
Gas fees, despite their name, have nothing to do with the use of liquid fuels or the environmental effects of mining. Instead, it is the compensation miners receive for adding or processing transactions.
On the Ethereum blockchain, “gas” is the fee or pricing value needed to complete a transaction or contract. The gas is used to distribute Ethereum virtual machine (EVM) resources so that decentralized applications like smart contracts can self-execute in a safe but decentralized manner. It is priced in small fractions of the cryptocurrency ether (ETH), also known as gwei and occasionally termed nanoeths.
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