With the 2nd highest market cap of any cryptocurrency behind Bitcoin, Ethereum is used by millions around the world. But what exactly are the "gas fees" that make the network run?
In this article, we break down the Ethereum network fees known as ‘gas.' We’ll look at why they can be so high at times, how you can plan ahead to cut costs, and what is being done to reduce gas fees moving forward.
What are ETH gas fees?
Gas fees are transaction fees on the Ethereum network that exist to help execute transactions for decentralized applications, as well as protect the network from spamming and malicious activity.
The use of gas ensures that transactions will be genuine and discourages bad actors from spamming the network with a high volume of transactions, potentially causing mass congestion and delays. Without the inclusion of fees, programs on the Ethereum Virtual Machine (EVM) would run forever without execution, bringing the entire network to a halt.
How is gas measured?
Ethereum gas prices are denoted in tiny units of ETH called Gwei. 1 Gwei is equal to 0.000000001 ETH. Looking at it another way, 1 ETH is the equivalent of 1 billion Gwei!
To give you an idea, during relatively normal hours a slow transaction could average between 10-16 Gwei, while a fast could cost around 40-50 Gwei. Though not nearly as common anymore, there have even been historical instances of astronomical Gwei thresholds, with average gas prices hovering around 1,000 Gwei, and some whales even paying as high as 100,000 Gwei!
Compared to traditional money transfers, sending crypto from one wallet to another is drastically cheaper, especially in the case of sending Ethereum. The good news is, it's incredibly rare for you to have to pay 100,000 Gwei just to send your ETH.
That said, if you’ve ever used Ethereum before, you may have noticed that gas fees can still be relatively high.
Why are gas fees so high?
Ethereum miners get their rewards for performing certain actions on the ETH newtwork, (currently through the proof of work model). The amount of work required to validate a block will be the same, regardless of how busy the network may be.
When the network is busier than usual, validators are naturally encouraged to select transactions with higher gas prices. For them, the incentive to perform these transactions includes rewards from the Ethereum gas fees, so miners are incentivized to choose ones that offer higher returns for their efforts first.
You can think of this as a blind auction, where users will make bids (in the form of Gwei) to incentivize miners to pick up their transactions. Like with a traditional auction, the highest bids will be chosen. In this case, being chosen means that those transactions or blocks will be prioritized and validated on the Ethereum blockchain first.
By bidding higher quantities of Gwei, your transaction becomes more appealing to miners. If you need your transaction to be processed faster, you can increase the Gwei to essentially move up in line. Have you ever been willing to pay more for a direct flight rather than a longer trip with multiple layovers? It’s kind of like that.
However, sometimes you may value your cash more than your time, and so the longer route could be more appealing. It all depends on how important it is for your transaction to go through. Regardless of the velocity you choose, your transaction will still start in the mempool.
What is the ETH mempool?
Before a transaction can be validated, it must first pass through the mempool. As Blocknative puts it, “the mempool can be thought of as a waiting area for transactions to be accepted into a block.”
The mempool is where the user bids are placed as Gwei in order for their blocks to be picked up and validated. So that the waiting area doesn’t turn into your personal Ethereum purgatory, it’s critical to pay enough Gwei and set your gas limit so that your transaction is validated in a timely manner.
What happens if you don’t pay enough gas?
If you choose a lower amount of gas, you are more likely to have a transaction fail than if you choose to pay more. Additionally, the transaction will take longer. Most wallets will allow you to select speeds such as (slow or fast) to make this decision easier. If you're trying to send ETH in especially busy times, choosing ‘fast’ may be the best option.
If you decide to choose a slow transaction with low gas, there is the possibility that it may fail. If this happens, you’ll still need to pay the gas fee, which will not be reversed. The reason for this is the miners still performed the work, and need to get paid in transaction fees.
Think of it this way: you're hungry and want to order some food through Uber eats (or your preferred delivery app.) The drivers around you are super busy and have plenty of other customers. But instead of placing the order, you first have to say how much you are going to tip the drivers.
If you offer a bigger 'tip' then drivers are far more likely to select your order and deliver your food first. If you offer a low amount, they might just ignore you. The catch is, they get to keep the tip no matter what. Like a blind auction, choosing the right amount to offer is paramount to your success.
The required gas amount also depends on how complex the transaction is. If you’re working with decentralized applications (dapps) or trying to execute a smart contract that has multiple steps and depends on more complex algorithmic functions, you’ll have to pay more gas.
Simple transactions, on the other hand, generally require lower amounts of Gwei and are easier to predict the price. Regardless of the complexity, the amount of ETH sent will not affect the gas price of your transaction. In either event, it’s critical to know how much gas will be required so that it is picked up by miners with enough gas to complete all the necessary processes.
So how can you choose the correct gas price?
You might be wondering, "can't I just always choose the highest gas limit to be safe?" Well, it’s not that easy. For one, if you don’t need your ETH right away, you you can avoid paying higher gas costs by choosing a slower option.
There are some technical aspects at play too: for each block, there is a maximum amount of gas that can be used. As of April 2021, this amount is approximately 15,000,000.
If a miner sees that a relatively simple transaction has low Gwei, they may choose that transaction to focus on the more appealing, high Gwei transactions instead. Simple transactions with lower Gwei and higher gas limits would fill up the block inefficiently (since, as the name suggests, gas limits are indeed limited).
This is not very appealing to miners.
Put yourself in their shoes: would you bother validating one transaction that takes up a disproportionate amount of block space? Or would you instead use your time and energy power more wisely, focusing on filling blocks efficiently with reasonable gas limits for similar amounts of Gwei?
The bottom line is that it all depends on how quickly you need to send your ETH, and how much you are willing to pay for it. Luckily, there are many resources that exist to help you save on gas which we'll discuss below.
How can you cut costs on gas fees?
In order to avoid paying high gas fees, there are several tactics you can employ:
Plan ahead: Schedule your transactions for times with less network congestion. Just like you’d check your favorite navigation app before heading out in your car, it can be beneficial to check which times have less network traffic. If there's massive volume on cryptocurrency exchanges, it might not be the best time to transfer.
Check your wallet: Most wallets will allow you to preview the estimated gas price that you’ll pay. If the gas price is too high for your liking, try again at another time when the network isn't as congested.
Use an external calculator: There are several other tools that can show you what current gas prices look like. Some of these include:
The future of Ethereum gas fees
After seeing how network congestion can lead to higher Ethereum gas prices, you may be wondering what's being done to reduce costs. The good news is that there is currently in development a rollout of improvements to the network, known as Ethereum 2.0.
One of the main features of ETH 2 will help declutter the network by replicating the Ethereum mainnet’s capabilities across multiple nodes. With this exponentially higher processing capability, the Ethereum network is expected to see much greater efficiency and faster processing speeds. And with the transition to a proof-of-stake validation system, users and miners will all end up with reduced costs and more technically more profit.
Imagine going from a one-lane road to a 64-lane highway. That’s how the new ETH2 model promises to free up space as the network continues to improve its scalability.
Now that you understand how gas works, it's time to buy eth and get trading.