gas-fees

What Are Gas Fees? And Why Gas Fees Matter To Understand Ethereum

Gas fees are charged to users to cover the cost of the computing energy required to process and validate transactions on the Ethereum blockchain. Indeed, When a user wants to transact in ETH on the Ethereum blockchain, they must pay a gas fee. Therefore, gas fees are the cost to operate a transaction on top of Ethereum’s blockchain. Looking at how gas fees evolve is critical for the health of Ethereum’s blockchain, as high gas fees can determine the congestion of the protocol.

Understanding gas fees

To keep the Ethereum network operational and secure, cryptocurrency miners receive ETH as a reward for their contributions. These rewards are funded by the gas fee, which is charged to users in the Gwei denomination to process and validate their transactions. For interest’s sake, one Gwei is worth 0.000000001 ETH.

The concept of gas was introduced to create a distinct value layer that clarified computational expenses on the Ethereum network. Perhaps more to the point, a distinct unit for gas fees provides separation between the value of transactional token Ether and the computational cost of using the Ethereum Virtual Machine (EVM). 

Gas fees are constrained by gas limits, which define the maximum amount of gas a user is willing to spend on a given transaction. Ethereum miners may choose to ignore a transaction if the gas price limit is too low. As a result, the price of gas fluctuates according to supply and demand. 

The minimum amount of gas required to process a standard transaction is 21,000 gas units multiplied by the average cost in Gwei. This calculation can be performed in any digital wallet supporting ETH and Ethereum-based tokens, with users able to select the speed of their transaction based on how much they are willing to pay.

Why do gas fees exist?

As we hinted at earlier, gas fees exist to help the network function properly by compensating miners for the computing energy required to process transactions.

Without gas fees, a user could theoretically execute a program that never ends – maliciously or otherwise – and bring the entire network to a standstill. To avoid this scenario, each transaction is required to limit how many computational steps of code execution it can use. 

The fundamental unit of computation, as you might have surmised, is gas. 

Which transactions require gas?

Cryptocurrency transactions are not the sole domain of gas fees. Indeed, any transaction involving Ethereum-based tokens requires the user to part with ETH to pay for gas.

Peer-to-peer transactions on Ethereum are also subject to gas fees, with the participating wallet or exchange estimating how much gas is required to complete the transaction. Transactions that require more computational power will incur higher prices.

Smart contracts used for dApps on the EVM will also require gas fees to run, with some time-sensitive contacts requiring hundreds of thousands of gas units. These contracts may represent financial agreements, employee contracts, escrow services, and decentralized gambling facilities, among many others.

How can gas fees be reduced?

Gas fees have risen because of the surging popularity of Ethereum. As dApps become more functionally complex, the number of operations a smart contract needs to perform is also trending upwards. 

Both these factors reduce supply and increase demand. So what can be done?

For the user, it can be helpful to set a tip that indicates the priority level of a transaction. Blockchain miners tend to prefer transactions that offer a higher tip for obvious reasons.

Gas prices can also be monitored by a range of tools, including browser extensions, estimators, and consumer-oriented metrics for the Ethereum gas market.

Network upgrades

Layer 2 scaling is a network upgrade seeking to improve gas costs, user experience, and scalability. 

The new proof-of-stake model reduces energy costs and reliance on specialized hardware, with network security based on consensus and not on financial commitment.

Key takeaways:

  • Gas fees are charged to users to cover the cost of the computing energy required to process and validate transactions on the Ethereum blockchain.
  • Cryptocurrency transactions are not the sole domain of gas fees. Indeed, any transaction involving Ethereum-based tokens requires the user to part with ETH to pay for gas.
  • Gas fees have risen in line with the surging popularity of Ethereum and the increasing complexity of dApp smart contracts. Network upgrades and the offering of higher tips to miners may at least partly offset increasing costs.
ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Other applications on top of Ethereum

DeFi

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

Tokenization

erc-20-token
An ERC-20 Token stands for “Ethereum Request for Comments,” which is a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform.

Decentralized Autonomous Organizations

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

NFTs

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

Staking

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like Ethereum’s Casper protocol). Proof of Stake has the advantage of the security, reduced risk of centralization, and energy efficiency.

Lear More From The Book Blockchain Business Models

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Read Next: EthereumBlockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

Read Also: Proof-of-stakeProof-of-workBlockchainERC-20DAONFT.

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