Gas Fee is a fee charged for processing a transaction on the Ethereum blockchain. The fee, a small fraction of the total value of the intended transaction, is given as incentives to miners who secure the blockchain and act as validators for blockchain transactions.
Ethereum blockchain calculates gas fees using a unit of billion Wei, called gwei or Gigawei. Wei is the smallest unit of the Ethereum cryptocurrency.
Gas and fees
It’s often a common experience to come across a huge gas fee during a transaction on the Ethereum blockchain. The rise and fall of gas fees are dependent on the number of transactions occurring at that particular time.
Irrespective of the cost of the gas fee, it doesn’t guarantee the success of such a transaction. It’s more like a gateway to getting to transaction processing. However, provided all things are positive, most transactions scale through.
What is gas?
Gas on the Ethereum blockchain refers to the amount of computing it takes to validate a transaction. The amount of computing required is proportional to the energy consumption, hence the variation in gas prices depending on transaction volume.
How are Gas Fees Calculated?
In the most basic terms, the gas fee denotes the relationship between network usage, the computing power required, and speed. It’s, however, a bit deeper than that, especially since the London upgrade in August 2021.
Before the London upgrade
Before the London upgrade, gas fees calculation tells the relationship between the gas limit (total computing power required to validate a transaction) and the gas price (gas price per unit required to validate a certain amount of ETH).
Gas limit X gas price per unit required = gas price.
That was before the London upgrade; however, things have changed.
After the London upgrade
With the London upgrade in August 2021 came changes to the process of calculating the gas fee. It now focuses more on the predictability of the gas fees per transaction. It becomes easier to estimate the total gas fees required to validate a transaction.
Additionally, an added feature is the base fee to the factors that determine the gas fee.
Gas unit required X Base fee + Tip = Gass fee.
Block size refers to the total space available for transactions to get a spot in a validation block. Before the London upgrade, only one type of block size existed, meaning users had to compete for space on a single block. Once the block gets saturated, gas fees increase drastically, discouraging many users from continuing their transactions.
Alternatively, the London upgrade came with variable-sized blocks that contract or expand depending on demand for block space.
Base fee became a thing after the London network upgrade. It refers to the cost required to earn a space on a block for transaction validation.
The blockchain burns the base fee, removing it from circulation.
Priority fee (tips)
The base fee doesn’t go to the miners; instead, users must include a tip, called priority fee, as an incentive.
The maximum fee a user is willing to part with is the gas fee per transaction.
The max fee must exceed the value of the base fee plus the tip. The surplus from the max returns to the user after the transaction.
Calculating fees (examples)
This version of the Ethereum improvement proposal (EIP-1559) contains the details implemented during the London network upgrade. The highlight is the introduction of a layer of complexity to gas fee calculation. Details already captured above.
Why do gas fees exist?
Gas fees help keep the Ethereum blockchain secured from spammers by incentivizing miners who perform complex computations to verify and validate every transaction.
What is a gas limit?
The gas limit refers to the total gas unit required to execute a transaction on the Ethereum blockchain. The gas limit for a simple transfer on the blockchain is 21,000 gas units. If a user sets a higher gas limit, they get a refund of the surplus.
But in situations where the set gas limit is too low, the transaction is executed up to the limit and stopped, the transaction won’t be successful, and the gas fee is lost.
Why can gas fees get so high?
The Ethereum blockchain currently runs on a Proof-of-Work system which requires miners to execute complex computations to validate each transaction.
Aside from that, the Ethereum blockchain is very popular. Consequently, an enormous number of users compete for space to get their transactions validated. Depending on the transaction’s importance to a user, they try to outbid others to get their transaction approved.
Initiatives to reduce gas costs
The Ethereum blockchain is already working on an upgrade to Ethereum 1.0.
Ethereum 2.0, which will fully roll out by 2023, is based on the Proof-of-Stake System, eliminating complex computations. Instead, it uses a staking mechanism from miners, thus drastically reducing energy costs and, consequently, gas fees.
Strategies for you to reduce gas costs
A few strategies exist that help users execute transactions for reduced gas fees.
One of the fastest ways is setting a tip that corresponds with the transaction’s priority. Urgent transactions cost more. In contrast, slow transactions are cheaper.
You can also monitor gas prices here to target low gas prices.