What Is Gas (Ethereum)?
Gas fees on the Ethereum blockchain are essential for conducting transactions and executing contracts. Priced in gwei, smaller fractions of Ethereum's cryptocurrency, ETH, these fees compensate validators for the resources expended during transaction processing. The price of gas fluctuates based on supply, demand, and network capacity, making it a competitive and dynamic component of Ethereum's operation.
KEY TAKEAWAYS
Gas fees are essential for executing transactions and smart contracts on the Ethereum blockchain and are measured in gwei, a smaller denomination of ether (ETH).
Gas fees compensate validators, who maintain and secure the blockchain, especially under the proof-of-stake model, which began in September 2022.
In August 2021, Ethereum adjusted its fee structure to include a base fee and a priority fee, making transaction acceleration possible by tipping validators.
Although The Merge aimed at improving the Ethereum network, high transaction fees remain a concern, with solutions like Layer 2 technologies providing potential relief.
The Role of Gas in Ethereum Transactions
Gas fees were introduced to reward miners for maintaining and securing the blockchain, along with block rewards.
Since September 2022, with the introduction of proof-of-stake, part of the gas fee now rewards users for staking ETH. The more ETH a user stakes, the more they can earn.
IMPORTANT
A transaction fee is similar to the fee you pay for a money wire transfer. You're paying the service provider for using their network.
Ethereum validators earn these fees for staking their ether and verifying transactions on the network.
Gas fees rise and fall in response to supply and demand for transactions—if the network is congested, gas prices may be high. On the other hand, they could be low if there is not much traffic.
Calculating Gas Fees in Ethereum
Initially, gas fees were determined by the gas limit and price per unit. In August 2021, Ethereum changed its calculations for gas fees to use a base fee (a set fee for the transaction set by the network), units of gas required, and a priority fee. The priority fee is a tip to the validator that chooses a transaction—the more you tip, the higher the chances are that your transaction will be processed faster.1
Gas fees are calculated using this formula:
Units of Gas Used * (Base Fee + Priority Fee)
So, imagine you wanted to pay a friend 2 ETH, and you think it will require two units of gas. The base fee is 11 gwei, and you provide a tip of 3 gwei. Your gas fee would be:
2 * (11 gwei + 3 gwei) = 28 gwei
This equals 0.000000028 ETH. It's added to your transfer total, which is now 2.000000028 ETH.
Understanding the Ethereum Virtual Machine and Gas Fees
Ethereum, as a platform and system, is designed to be used by others to create more use cases for blockchain and cryptocurrency. For this reason, it is commonly called the Ethereum Virtual Machine, because applications can be created that run on it. The EVM is essentially a large virtual computer, like an application in the cloud, that runs other blockchain-based applications within it.
The EVM has been used to create many decentralized apps, cryptocurrencies, and tokens. These require gas fees because they operate on the Ethereum blockchain. Because the Ethereum blockchain is part of the EVM, the cryptocurrencies built on that blockchain require gas fees. For example, a popular token built on Ethereum's blockchain is DAI. Because it uses the Ethereum blockchain, users need to pay gas fees in gwei to conduct transactions on the chain.
Addressing Concerns Over High Ethereum Gas Fees
An ongoing concern for any cryptocurrency that requires transaction fees is the price users pay for the transactions. Before 2020, Ethereum's gas fees were usually just a few cents, but often spiked. After January 2020, they rose significantly, frequently exceeding $20, as more users joined.
After The Merge—the merge of the Beacon Chain and the Ethereum main chain when proof-of-stake was implemented—fees began to range from a few dollars to as high as $30. However, The Merge was not designed to address the problem of high fees. It was one of many updates that, when combined, are believed to eventually lower gas fees.2
Strategies to Minimize Ethereum Gas Fees
There are ways to avoid high fees. First, try timing your transactions during less busy periods on the network. EtherScan provides a gas tracker that shows the day's high, low, and average gas fees, so you can try to time your necessary transactions using its tracker or another like it.3 The website also provides a Chrome extension you can install to the browser that lets you see gas prices in real time.
Second, you can use Layer 2 solutions or dApps for your transactions. Taking your activity off the main chain is one of the best ways to keep your fees low.
Why Is Gas So High on Ethereum Right Now?
Ethereum's transaction fees are the result of network traffic and validator availability. When there is more traffic, fees are higher.
What Is Ethereum Gas?
Ethereum gas is a blockchain transaction fee paid to network validators for their services to the blockchain. Without the fees, there would be no incentive for anyone to stake their ETH and help secure the network.
Does Ethereum Run on Gas?
The Ethereum gas fee exists to pay network validators for their work securing the blockchain and network.1 Without the fees, there would be few reasons to stake ETH and become a validator. The network would be at risk without validators and the work they do. So, it essentially runs on gas.
The Bottom Line
Gas fees are used on the Ethereum blockchain and network to incentivize users to stake their ETH. Staking works to secure the blockchain because it discourages dishonest behavior. For staking their ETH, owners are given small payments as a reward for helping to secure the blockchain and help it function.
Fees are determined by the amount of network traffic, the supply of validators, and the demand for transaction verification. The higher the demand and traffic, the higher the fees. When traffic and demand are lower, fees become lower.
