Gas fees, also referred to as transaction fees, is a term that describes the pricing mechanism on the Ethereum blockchain. This is a fee charged for executing transactions and smart contracts. These fees are paid in Ether (ETH), the native cryptocurrency of the Ethereum network.
This article will break down the following topics:
- Why does Ethereum charge gas fees?
- Which transactions require gas?
- How to calculate gas price
- Why are gas fees so high?
- How to reduce gas price
- How will Ethereum 2.0 lower gas fees?
Why does Ethereum charge transactions fees?
Cryptocurrencies and other DeFi applications use blockchain technology to operate. A blockchain is a public ledger that records and displays all the transactions that are processed on a given network. Blockchain technology functions by having multiple computers or ‘nodes’ that work to verify these transactions. This is how it is able to operate without one central entity controlling the network like they do in traditional banking and finance systems.
On a network like Ethereum, transactions are verified by miners who are also referred to as validators. In addition to protecting the network from attacks, these miners also streamline transactions so the Ethereum blockchain does not get overloaded.
Users are therefore required to pay gas fees to compensate for the computing energy needed to process and validate transactions. Miners are incentivised to validate transactions before other miners in order to earn ETH from the gas fees.
Which transactions require gas?
The Ethereum platform isn’t just limited to cryptocurrency transactions. Its network has the capability to execute entire smart contracts and decentralized applications (Dapps). Gas is the unit for measuring the amount of computational effort used to perform each task. However gas does not have a monetary value. Each type of transaction has a different amount of gas units needed to run. The following details the gas required for conducting different projects on Ethereum:
- Adding two numbers = 3 gas units
- Getting the balance for an account = 400 gas units
- Sending a transaction = 21,000 gas units
Peer-to-peer transactions on Ethereum are also subject to gas costs. Typically, the wallet or exchange that is used to send the ETH will have an estimate of how much gas is required to complete the transaction. Demanding transactions that require validation will naturally incur higher gas prices.
Smart contracts used for Dapps will usually have a combination of nodes working together. Therefore a combination of gas units are required to allow the program to run. Some time-sensitive smart contracts can take hundreds of thousands of gas units.
How to Calculate Gas Fees
It is important to understand how much gas is required to complete a transaction. Failure to pay gas fees will result in an incomplete transaction.
The amount of gas you need also depends on how large your contract is and how fast you want it to be executed. Gas units are denoted in GWEI which is a billionth of an ETH or 0.000000001 ETH. GWEI is used to mitigate the risk of ETH price fluctuations affecting gas costs.
Each transaction on Ethereum also has a gas limit. This determines the maximum amount someone is willing to spend on a transaction. A higher gas limit means that more effort is required to execute that particular transaction or smart contract. Having a gas fee and a gas limit incentivises the developers to keep their smart contracts as simple and precise as possible. This works well as it reduces network congestion.
Why are Gas Fees so High?
In May 2021, gas fees hit an all-time high of $4300 (USD) following a price surge in Ethereum. Gas price typically increases when the popularity of Ethereum rises. When there are more people transacting through the Ethereum network, miners have more options to choose from and can prioritise higher transaction fee projects. If a transaction or project is urgent and needs validation quickly, then it’s likely that the gas fee will be high.
How to Reduce Gas Fees
One simple way to reduce gas price is the timing of your transaction. Gas fees tend to fluctuate throughout the day. Check out the gas fee fluctuations for the past week to see when the cheapest gas fees occur.
How will Ethereum 2.0 lower gas fees?
There is a lot of excitement about Ethereum’s upcoming update that is being referred to as ‘Ethereum 2.0.’ Ethereum 2.0 aims to improve on the scalability and security issues of the blockchain. The main component of the upgrade is to move from its current Proof of Work (PoW) mechanism to a more efficient Proof of Stake (PoS) consensus mechanism. This will allow miners and validators to use their ETH as leverage to keep the platform running and secure. The new PoS system will reduce the energy consumption of Ethereum by roughly 99%.
Ethereum 2.0 will also implement sharding, a process technique that requires all data to undergo verification by all participating nodes before it is added to the blockchain.
The current infrastructure of Ethereum is able to process a maximum of 15 transactions per second, while Ethereum 2.0 will be able to process thousands of transactions per second.
Vitalik Buterin and the entire Ethereum team are optimistic that gas price will decrease with the launch of Ethereum 2.0. Given the number of transactions per second will significantly increase, this will reduce congestion on the platform which in turn will reduce gas fees.