Blockchain technology and cryptocurrency have changed the way money and financial transactions are perceived. Cryptocurrencies are virtual currencies that are not issued or regulated by any authority like a central bank. These are based on blockchain technology and are secured by cryptography.
Using cryptocurrencies, you can instantly execute financial or other transactions. While blockchains are based on peer-to-peer technology, it does not mean transactions on these networks are free.
In fact, a fee has to be paid every time you conduct a transaction on a blockchain. This fee is an essential part of the incentive that encourages miners to verify transactions.
While the term “gas fee” is associated mainly with the Ethereum network, every smart contract blockchain requires some sort of payment to process and add the transaction to the chain. The exact term may vary but the concept is the same.
Still confused? No issue. This article will help you learn about gas fee meaning, and the use of gas fees in blockchain and cryptocurrency and will tell you why many times your gas fee is so high.
What is Gas Fee in Blockchain?
Gas fee is a term used to refer to transaction fees on the Ethereum blockchain. A transaction fee has to be paid every time an activity is performed on a blockchain network as an incentive for the computational power needed to process and complete the transaction.
The term “gas fee” is specific to the Ethereum network. Other chains like Solana and Bitcoin use terms like transaction fees, miner fees etc. However, since Ethereum is the largest blockchain platform, the term gas fee is used to refer to the transaction fee on all blockchain platforms in common parlance.
To understand gas fees, let us first understand the way in which transactions are validated on a blockchain. As we said before, every transaction on a blockchain needs computational power to be processed. Since blockchain ledgers are decentralized, there is a large network of computers that compute the transactions.
The individuals who provide computing power for this process are known as network validators in proof-of-stake(PoS) protocols and miners in the case of proof-of-work(PoW) protocols.
These validators purchase and run their own equipment and hence, it is important to compensate them for the same. This is where gas fees come in. It is these gas fees that incentivize validators to properly process the transactions.
Further, gas fees help to secure the network as bad actors are discouraged from spamming the network due to mandatory fees for every transaction executed on the network.
Who Gets Gas Fees?
Gas fees are given to miners who use their computing power to validate the transaction on a proof-of-work(PoW)–based blockchain network. Miners compete with their equipment to validate a new transaction by randomly generating cryptographic hashes. The miner that first generates the hash gets to validate the transaction and earns the block reward and the fees from the said transaction.
This is similar for networks that use the PoS mechanism such as Ethereum 2.0. Validators have to lock a certain amount of cryptocurrency to validate transactions. Those who are selected to verify new transactions are rewarded with gas fees.
How is Gas Fee Calculated?
Broadly, gas fees are based on the simple principle of demand and supply. Here, demand is the transaction submitted for validation and supply is the total number of validators on the network. Gas fees are generally updated in real time as per the network conditions such that miners or validators can maximize profits and users can pay more to have their transactions processed first.
Before Ethereum’s London upgrade, gas fees were calculated using gas price and gas limit. Gas price is the price a user is willing to pay for each gas unit while gas limit is the maximum gas amount that can be used for a transaction. Both gas price and gas limit are set by the user.
In the London upgrade in 2021, Ethereum implemented EIP-1559 in order to make gas fees more predictable. It has introduced variable-sized blocks and a base fee that is calculated by comparing the size of the previous block with the target size.
The base fee is burned after the transaction is completed and so, in order to incentivize miners to record transactions on a block, the London upgrade has introduced a priority fee(tip). A small tip may be given to miners under normal conditions but transactions needing preferential execution require a higher tip.
Ultimately, the formula for calculating gas fees on Ethereum in the new system comes out to be: Gas limit x (Base fee+priority fee).
Why is ETH Gas Fee High?
Ethereum is notorious for its gas fee rates which can often be prohibitively expensive. But why exactly is the Ethereum gas fee so high? Well, there are several reasons for this. The gas fee for your transaction is determined by the complexity of your transaction, network conditions and the popularity of the network.
Level of Network Activity
Firstly, Ethereum can handle only a limited amount of transactions per second. When the demand on the network increases, it leads to a rise in gas fee rates as well. Users can offer miners a higher price or ‘tip’ to prioritize their transactions. This also drives up gas fees.
Sustained Interest in the Ethereum Blockchain
Secondly, Ethereum is the most popular or in-demand blockchain network due to several reasons. As more developers use it to develop their projects and execute transactions, the associated gas fees may go up as well.
The Complexity of the Transaction
Next, the kind of transaction that you are trying to execute also matters in determining the final gas fee that you pay. For example, transferring small amounts of ETH is a simple transaction requiring minimal data transfer and hence gas fees are low.
On the other hand, minting an NFT or executing a smart contract is a more complex task. It involves large amounts of data transfer and requires much more computing power for processing the transaction than a simple ETH transfer. Therefore, the more difficult and complex your transaction, the higher the gas fee that you pay.
However, it is expected that Ethereum’s shift to the PoS consensus mechanism and the implementation of EIP-1559 under the London upgrade would make gas fees more predictable.
How Can I Reduce My ETH Gas Fee?
More than anything, the question that matters the most for users is how to lower the Ethereum gas fees. Turns out, there are some tips and tricks that you can use to reduce the gas fees for your transactions.
Optimizing Transaction Timings
The most basic thing you can do is to wait for the network to clear and gas fees to drop before you initiate your transaction. This way, you don’t have to compete with a large number of users for block space and get your transaction processed for a reasonable fee.
You can study Ethereum fluctuation charts to estimate the time gas prices go down. However, constantly monitoring the market can be time-consuming and exhausting.
Using a Gas Fee Tracking Tool
You can use a tool like Etherscan’s gas tracker to keep track of when network activity is lowered and gas fees are low. There are tracker tools that will also notify you when gas prices fall below the threshold specified by you. Along with that, you can also view gas heatmaps and the next gas block prediction.
Using a Layer-2 Solution
As the issue of high gas fees has been a consistent problem on Ethereum, many Layer-2 solutions have come up to address this issue. Layer-2 solutions like Polygon, Plasma and Optimism improve Ethereum’s scalability by shifting some of the transactional burden to the second layer which increases speed on the mainnet and lowers gas fees.
Using DeFi Saver Apps
You can use a DeFi Saver app to run your Ethereum activities virtually and then use the simulation to estimate the ETH gas fee. This estimate will help you minimize the gas fee by making the necessary changes to your transactions and executing them at a time of lowered activity on the network.
Utilizing Gas Tokens
Deleting data elements on Ethereum can get you reimbursements in ETH. This forms the foundation for gas tokens and when the fees are low, you can mint a substantial amount of gas tokens which can then be exchanged for ETH when you need to conduct a transaction on Ethereum.
Using DApps for Rewards and Rebates
There are many Ethereum DApps that have substantially lower gas fees or offer rebates on ETH purchases. Balancer, for example, often reduces the gas fee for high-frequency traders and also offers up to 90% gas fee reimbursements in BAL.
Final Words
Gas fee is unavoidable if you execute any type of transaction on a blockchain. Rather it is an important reason why miners/validators use their resources and computing power to verify your transactions. The gas fee is the compensation to them for settling your transaction.
However, on the user end, it does not make much financial sense to pay a costly gas fee for a small transaction. But high and unpredictable gas fees due to increased network activity are a recurring problem on Ethereum partly because it is the most popular blockchain.
To address this issue, it has shifted to the PoS consensus mechanism and adopted EIP-1559 and layer-2 solutions to increase transaction speeds and make gas fees more predictable. There are several other methods that you can also use to reduce the ETH gas fees.