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Beginner’s Guide to Ethereum Gas Fees

As you may have already heard, there is indeed no such thing as a free lunch. Gas fees are payments individuals must pay in order to perform any transaction on the Ethereum blockchain and any other blockchain. These fees are charged by the block miners in return for their valuable time and computing power used to verify the transactions paid in the blockchain’s native cryptocurrency.

Prior to 2020, Ethereum’s gas fees were relatively affordable. With the rising number of network users, however, the frustration from whale-sized fees have sparked much discontent within the crypto community. To get you up to speed and provide you with a competitive edge on this topic, we have put together this in-depth explainer on gas fees.

Who are the Main Players?

There are two main factors to consider about each blockchain – block time and transaction throughput. In general, the faster blocks are created the higher the number of transactions they can process at one time and the less block-space competition there is. This, in turn, leads to cheaper transaction fees for all users on the network.

The main players are Bitcoin, Ethereum and Solana – each of them having different block times and sizes. Looking at Bitcoin, things can get very expensive with block times of around 10 minutes and a maximum block size of 1 MB, which would mean that each block can process anywhere from 500 to 4,000+ transactions depending on the transaction size. Solana, on the other hand, offers a much cheaper alternative with block time of around 0.4 seconds with a throughput of 20,000+ transactions.

Meanwhile, the most popular blockchain for NFTs, DeFi, dApps, and other Web3 activity, Ethereum, has a block time of 13 seconds with block size of around 70 transactions, making transactions fees extra salty for most Ethereum users. The crypto community tends to rile against such absurdly expensive fees when the network gets congested, pushing people to bid massive amounts to get their transactions verified faster.

How are Gas Fees Calculated?

As the first step to understanding why gas prices are so expensive, it’s important to understand how they are calculated. Ethereum uses a metric system of denominated units called “wei”, where 1 ETH is equal to 1 quintillion wei, a number with 18 zeros after it. The most common denomination of wei and the one representing gas fees is gigawei (or gwei). That’s 1 billion wei, with the average transaction fee hovering around 0.0000001 ETH. Let’s dive deeper to understand how the total fee is actually calculated and what each component means:

The formula is: total fee = gas unit * (base fee + miner tip)

  • Gas units (limits): The maximum amount of gas a user is willing to pay for a transaction is adjusted by the individual and must be carefully chosen. It is referred to as gas units. It’s important to note that different types of interactions with the Ethereum blockchain require different amounts of gas fees to complete.
  • Base fee: The necessary minimum amount of gas required to include a transaction on the Ethereum blockchain. The base fee can go higher or lower depending on the number of users interacting with the network at any given time.
  • Miner Tips: This ‘optional’ fee is also known as priority fee and can be included in the transaction to provide economic incentive for Ethereum miners to prioritize completing certain transaction before others.

A very important aspect of setting up your gas unit limit correctly is understanding that there is no refund. If the gas unit limit is too low, you risk running out of gas while verifying. If the miners have already initiated the process of your transaction, but the gas is not enough, the transaction won’t go through and you will have to take the loss.

To give you an example of the total fee formula in action, let’s say that you are looking to send your friend 1 ETH and the current gas required on the Ethereum network is 25,000 gwei. You’ll set that as your gas limit. At that time of transfer, the base fee is 200 gwei. However, you need to send this money right now as it’s your friend’s birthday, so you tip 40 gwei on top of the transaction. In this scenario, the formula would look like this:

Total fee to send your friend 1 ETH = 25,000 gwei * (200 gwei + 40 gwei)

This gives a total of 6,000,000 gwei, or 0.006 ETH, which will be an extra cost added on top of the 1 ETH you are sending.

As you get the gist of it the Ethereum ecosystem is having troubles scaling as more user are using their services and the available miners are not increasing at a sustainable proportional amount driving gas prices too high up. The Ethereum developers understand this, which is why the new major update to the Ethereum network, Ethereum 2.0, will be a game changer. Ethereum 2.0 will move away from the consensus algorithm of proof-of-work (PoW) and switch to proof-of-stake (PoS), significantly improving transaction-processing capabilities as well as bringing much lower fees.

How to Spend Less on Gas Costs

Ethereum 2.0 will arrive soon, but how can you use the Ethereum blockchain right now without paying such absurd fees? Well, there are some tips and tricks to help you with that.

Pick the right time and be patient

Higher demand on any blockchain tends to drive the price up. The logical thing to do here is to pick times when less people are interacting with the Ethereum network. You will still have to pay a total fee, however it will be much smaller. Usually the weekends and late nights are a great time for this.

Set a max fee limit on your transaction

By setting up a max fee on your gas fees helps you avoid unexpected large increases of gas fees.

Rebates

Some dApps offer discounts and rebates for gas fees. They usually achieve this by grouping individuals transactions into a pot when processing.

Tokens

Minting gas tokens when prices are low and redeeming them when they are high is another option to reduce your gas fees.

Layer 2 scaling solutions

Layer 2 scaling solutions are extension tools to increase the speed, cost and number of transactions. Some popular examples include Polygon, Optimism, Loopring and dYdX. They are compatible with the Ethereum network and are a great solution for reducing high gas fees.

While there is much more to learn about gas fees, ETH and ETH 2.0, by now you should have a solid understanding of gas fees and how they work. Don’t forget to always keep extra cryptocurrency in your wallet for gas fees. You’re going to need it.

The opinions presented in this article do not in any way constitute trading, investing or financial advice.

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