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Ethereum gas fees are the transaction fees charged when moving funds on the Ethereum blockchain network. “Gas” refers to the amount of computational power it takes to process a transaction on the Ethereum network. Similar to the gas you put in your car, you might think of this digital gas as the fuel needed for the Ethereum blockchain engine to run successfully.
Most blockchain networks carry transaction fees for their users, and the fee assessed may be higher or lower than Ethereum. Gas fees are specific to Ethereum, and users pay for each transaction using Ethereum’s native coin, Ether (ETH).
How do gas fees work?
In order to successfully complete any cryptocurrency transaction, the transaction must be validated before it is added to the blockchain. Miners on the Ethereum network perform the crucial task of verifying transactions, and the equipment needed to run a mining operation, not to mention the electricity needed to keep it running, can be extremely expensive. To compensate for this, miners are rewarded with the gas fees for each transaction they verify.
Generally, complicated transactions that require more computational power, such as using smart contracts or spending on decentralized apps (referred to as dApps), will have a higher fee. It can take time for a transaction to be processed, but users now have the option to pay a priority fee — or tip — in addition to the gas fee in order to incentivize miners to verify transactions faster.
While gas fees add to the cost of making a transaction on Ethereum’s platform, they do serve an important purpose: They make the Ethereum blockchain more secure for its users. Requiring a fee for each transaction makes Ethereum a less attractive target for hackers who may try to spam the network with requests. Weeding out potential hackers with a fee improves cybersecurity and also helps the network run more efficiently without spammers bogging down capacity.
» The Ethereum network is moving away from mining: What the Ethereum merge means for you
How much do they cost?
Much like the gas we put in our car, the price of gas fees on Ethereum’s platform can go up and down. Lately, critics of Ethereum have been frustrated with higher gas fees and the time it takes to process a transaction. If you’ve ever been hit with a “surge charge” from Uber during a time when rides are in high demand, you may understand this frustration very well.
Gas fees are largely determined by supply and demand: supply being the computational capacity of the miners on the Ethereum network, and demand being the number of transaction requests at any given time. If the number of transaction requests is high, gas fees will generally go up and it may take longer for your transaction to go through. In these cases, users may increase their priority fee in an effort to entice miners to validate their transaction requests first.
How to calculate gas fees
There is a formula you can use to calculate gas fees for each transaction, but there are a few key terms to understand before we use the formula.
Gwei: Gas fees usually cost much less than the price of ETH. In order to simplify the calculation, gas fees are measured in gwei. 1 ETH cryptocurrency coin is equal to 1 billion gwei (1 ETH = 1,000,000,000 gwei).
Gas units: The amount of energy, or computational power, that is consumed for each transaction. Each gas unit represents 1 gwei.
Gas limit: The maximum amount of gas you are willing to spend on a given transaction, which is later multiplied by the base fee plus tip. Gas limits are typically set at a fixed amount depending on the type of transaction. You must be careful to ensure the gas limit meets the amount required for the transaction you are trying to execute. A simple transaction, like transferring ETH from one user to another, would require a gas limit of 21,000 gwei. If you set your gas limit at 30,000, you get 9,000 gwei back after the transaction is completed. However, if you had set the gas limit at 10,000 gwei, the network would consume the 10,000 as it attempts to validate the transaction. Not only will the transaction fail, but you’ll lose the gwei that was consumed during the attempt. Generally, your wallet should indicate the gas limit for the transaction you want to make.
Base fee: The minimum amount of gas required to perform a transaction on the Ethereum network. Base fees are determined by supply and demand, and are adjusted based on the number of transactions happening on the network in real time.
Priority fee (tip): An extra fee that users can choose to pay so that miners are incentivized to validate their transaction requests sooner.
The formula to calculate your total fee is:
Total fee = Gas Limit x (Base Fee + Tip)
For example, say you wanted to send a friend 1 ETH on the Ethereum network and the gas limit was 21,000 gwei, and the base fee required to request the transaction is 100 gwei. In order to try to get this transaction expedited, you add a tip of 2 gwei. After making sure your limit is set for at least 21,000, you can request the transfer.
If we plug that into the formula, it looks like this: 21,000 x (100 + 2) = 2,142,000 gwei. The price of ETH fluctuates, but for this example, let’s say 1 ETH = $2,000 USD. That means:
When converted to ETH, your total gas fee would be 0.002142 ETH.
Your total gas fee for this transaction expressed in USD would be about $4.28.
How can you reduce your fees?
Unfortunately, gas fees are the cost of doing business on the Ethereum platform. All transactions on Ethereum include gas fees, so they can’t be avoided. However, there are a few ways to try to reduce gas fees:
The simplest way to reduce gas fees is to simply wait until there is less traffic on the Ethereum blockchain. Gas fees are driven by supply and demand, so as the number of transaction requests decreases, the cost of gas fees will go down. This isn’t always an option, and as Ethereum becomes more popular, the traffic on the network will continue to rise. But if you have the time, there might be a slow period when you can spend less on fees.
Reduce your tip
Priority fees are optional, and you don’t have to include a tip. However, submitting a transaction request without a tip gives less incentive for miners to handle your request first, so you might have to wait longer before your order is fulfilled.
Layer 2 scaling
Ethereum has been searching for solutions to improve scalability and reduce transaction time. Layer 2 scaling solutions allow for transactions to take place off-chain, meaning outside of the Ethereum network. The transaction is then added back to the network to be validated. Because the transaction only needs to be validated when it is added back, less gas is required.
Layer 2 scaling reduces gas fees for the transactions it handles, but it also reduces the amount of traffic on the Ethereum network, leading to lower base fees for all users. Layer 2 blockchains like Arbitrum One and Boba Network allow users to perform any transaction they could perform on the Ethereum blockchain, but with lower fees. You can bridge ETH directly from the Ethereum Mainnet (considered layer 1) over to layer 2. If you don't own ETH, some centralized exchanges will let you perform a direct withdrawal that can be deposited into a layer 2 network.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.