Understanding Gas Fees in Crypto
What comes to mind when you hear a random person talk about gas fees? Gasoline prices or a fee charged for sending 0.01 ETH to your friend’s crypto wallet? While car owners and regular people in the real world talk about gasoline prices, gas fees have a somewhat relevant role in the crypto space.
As terms that originated in the Ethereum network space, gas and gas fees have been around for a while. As essential as gas is to the Ethereum blockchain, it has been a pain point for most users, especially when there are high transaction volumes on the network.
This article will explore the concept of gas fees and compare their values across different blockchain networks. High gas fees are a problem for Ethereum users, and we will find out how they become astronomical and the viable solutions to high gas fees.
What are gas fees?
Sometimes, transactions on the blockchain are so swiftly completed that one might think they happen by magic. The nature of most blockchains either requires miners (for Proof of Work blockchains) or validators (for Proof of Stake protocols) to secure and validate the networks. One way or the other, these actors require incentives, apart from mining rewards (for PoW blockchains), to keep the network going, update blocks, and confirm transactions.
Ethereum heralded the smart contract era, and its consensus mechanism as a Proof of Work blockchain required miners who needed incentives to keep working. For any transaction to be completed on-chain, a miner had to do the computing work, validate the transaction, and update the blockchain. At this point, gas fees come into play.
Gas fees are the amount of ETH (Ethereum’s native cryptocurrency) required to complete interactions with the network. Whether you’re sending the JPEG of a rock to another user in faraway Puerto Rico or approving a connection to a dApp to your wallet, you will need to pay gas fees for any of those transactions. You pay gas fees to send crypto, miners receive the fees as compensation for their services, and everyone is happy.
How are gas fees calculated on Ethereum?
The Ethereum network uses a metric system of denominated units known as wei, such that one ether (ETH) is equal to one quintillion wei. Gas fees are represented by one of the wei denominations, gigawei or gwei, which means one billion wei. When your gas tracker says you need an average gas fee of 1000 gwei to complete a transaction, your transaction will cost a base fee of 0.000001 ETH.
1000 gwei is worth around $0.0018 at press time, which seems like a steal in the crypto space today. As you will come to discover, base fees do not represent the gas fee structure in its entirety, thanks to the Ethereum London upgrade. The London hard fork went live in August 2021, and it readjusted the gas fee structure significantly, allowing users to pay tips to miners to complete transactions. These tips, called priority fees, serve as an incentive to miners to confirm transactions faster.
Already, a gas unit (limit) is in place for each transaction. Different interactions on Ethereum require varying gas fees. Hence, users can adjust how much gas they are willing to spend on a trade, which puts some power back into their hands. However, if you set your gas limit below the suggested amount, your transaction will be reverted, but you will not receive a refund of your gas fees.
The base fee, like the 1000 gwei mentioned above, represents the minimum fees needed for a transaction to be recorded on the blockchain. Base fees depend on network congestion levels, so they are not constant. Based on the current arrangement, here’s how to calculate the total gas fees per transaction:
Total gas fee = (Base fee + Tip) × Gas unit (limits)
Say you wanted to send 1 ETH to your favorite person, and the gas limit on Ethereum is 25,000 gwei, the base fee is 200 gwei, and you choose to pay a tip of 40 gwei. Using the above formula:
Total gas fee = (200 + 40) × 25000 = 6 million gwei
6000000 gwei, or 0.006 ETH, is the gas fee you must spend to send 1 ETH. At press time, 0.006 ETH equals $10.8, at $1800 per ether.
Comparing gas fees across Blockchains
Although gas fees are native to Ethereum, the term is generally used to describe transaction fees on most blockchains, especially those with an underlying technology similar to Ethereum. Gas fees may sometimes be notoriously pricey on Ethereum, but Bitcoin has also recorded high transaction fees. Here’s how gas fees compare across popular blockchains:
Binance Smart Chain
The Ethereum Virtual Machine powers Binance Smart Chain; hence, the gas fee structure is similar to Ethereum. On BSC, 1 BNB is equal to one billion gwei — where one gwei is 0.000000001 BNB.
The average gas price on BSC is around 6.9 gwei, so sending 10 BNB should cost less than ten cents. Compared to Ethereum, BSC gas fees are much cheaper, and they also increase during times of network congestion.
Gas fees on Ethereum are the equivalent of Bitcoin transaction fees. Transaction fees on Bitcoin depend on how much block space the interaction consumes and not on the value of bitcoins sent.
Bitcoin has an average transaction fee of $2.088 at press time. Bitcoin transaction fees are also affected by network congestion, and during the crypto boom periods of 2017 and 2021, the average fee prices shot up to as high as $45 and $60, respectively.
Avalanche is another EVM-powered blockchain built to solve the trilemma of scalability, security, and decentralization. Transaction fee calculations on Avalanche are similar to Ethereum gas fee calculations, adopting the base fee, gas limit, and tip to determine the total gas fee.
Instead of gwei, Avalanche uses nAVAX (one billionth of 1 AVAX). The base gas fee on Avalanche at press time ranges between 25–27 nAVAX.
Polygon is a Layer2 blockchain solution built to scale Ethereum. As expected, gas fees are much lesser on Polygon, with a base fee of 34.2–32 gwei at press time.
Total gas fees on Polygon can cost between $0.0005 to $0.2, depending on the type of transaction.
Solana was dubbed the Ethereum killer at launch, and one of the reasons for the name is its low transaction fees.
The average transaction fee on the Solana network stands at around $0.00025 per transaction.
Why are Ethereum gas prices usually expensive?
Considering the networks mentioned above, the average gas fees on Ethereum are higher. Several reasons explain the high gas fees on Ethereum, one of them being that ether is expensive.
The price of ETH
Gas fees are paid in ether, and ETH is not a cheap cryptocurrency. The average price of 1 ETH at press time is $1,800, down approximately 63% from an all-time high of $4,891.70 in November 2021. One gwei is equivalent to $0.0000018, significantly higher than in the early days. In 2015, 1 ETH sold for as low as $0.42, which means one gwei then was equivalent to 4.2E-10 or $0.00000000042, much lower than it is today.
Six million gwei, the total gas fee in the example mentioned above, is worth around $10.8 today but would have been worth $0.00252 in 2016. When the price of 1 ETH was $100, six million gwei would have been worth $0.6. Many crypto analysts and enthusiasts expect ether’s value to reach $10,000 or $20,000 someday.
With the current gas fee structure, transactions will be almost impossible to complete. Ethereum is moving over to a Proof of Stake consensus mechanism, which we will explain subsequently, and the new structure is expected to reduce gas fees significantly.
Proof of Work blockchains need miners to validate transactions and secure the network, and gas fees compensate Ethereum miners. During peak periods like the 2017 and 2021 crypto surges, hundreds of thousands of transactions are carried out on Ethereum.
The Ethereum network has a slower transaction per second (TPS) rate than some of its competitors. Ethereum’s scalability problem means that users may have to pay higher gas fees to complete their transactions in time. Also, transactions are not spread evenly across 24 hours. Congestions during certain times of the day result in higher gas fees as miners prioritize users who pay more to fast-track their transactions.
Widespread adoption and DApp concentration
One of the reasons behind high congestion on Ethereum is the network’s value. Over seventy percent of decentralized applications in crypto are built on Ethereum, which results in over 250,000 daily transactions on some days.
For a network that can currently support only 30 transactions per second, congestion will naturally occur because of the sheer number of daily on-chain interactions.
Solutions for high gas fees
Exorbitant gas fees on Ethereum are a worry for many, with several dApps electing to build on alternative networks with much cheaper transaction fees. Although Ethereum users can reduce the amounts they pay in gas fees if they transact when the blockchain is less congested, usually during weekends, there are better solutions that can put the gas fee challenge to bed once and for all.
Layer-2 scaling solutions
Layer-2 blockchains are one of the most promising solutions for increasing Ethereum’s performance and reducing gas fees. Known as rollups, these tools work as extensions of the Ethereum network and are built on it, which is why they are called Layer-2 solutions. Popular examples include Arbitrum, Optimism, and Immutable X.
There are two main groups of rollups: optimistic and zero-knowledge rollups. While their approach differs, they handle interactions off-chain and interact with the Ethereum network to validate these transactions. This way, they can process thousands of transactions in a batch but only pay gas fees to update them on-chain. Hence, they spread the gas fees across all transactions, requiring users to pay far less than they would if they interacted directly with Ethereum.
The Ethereum Merge
Ethereum’s long-planned transition from the Proof of Work consensus mechanism to Proof of Stake is in the works. Many believe that the approach will not only make Ethereum more scalable but reduce gas fees significantly, enough to compete with prices on alternative networks.
The arrangement will do away with the miners, and it is hoped that the change will solve the high gas fee problem.
Gas fees are necessary to keep the Ethereum network secure and up-to-date, but they can sometimes be a bottleneck due to certain factors that make them rise astronomically.
Layer-2 scaling solutions have helped reduce the cost of gas fees, and transaction fees are lesser on alternatives like Solana, Avalanche, and BSC. The Ethereum Merge is on its way, and we expect it to put the final nail in the coffin of high gas fees.