What Are Ethereum (ETH) Gas Fees in Crypto?

What Are Ethereum (ETH) Gas Fees in Crypto?

Cryptocurrency transactions, like most standard transactions, require fees. On the Ethereum network, gas fees (including priority fees) are paid out to miners in Ether (ETH), Ethereum’s native transactional token, and facilitate all operations on the blockchain protocol.

But what is gas? What are gas fees? How are gas fees calculated? This article explains all that and more.

 

What Is Gas? What Are Gas Fees?

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Gas is the fundamental unit of computation for operations on the Ethereum network. It measures the amount of computational effort required for each transaction on the blockchain to take place and issues a fee for conducting those transactions.

Gas fees are the total transaction fees paid to the Ethereum network and its miners in order to execute a transaction on the blockchain. Since the London Upgrade, base fees are burned (decreasing the overall supply of Ether, or ETH) and priority fees, or tips, are given to miners (more on this in How Are Gas Fees Calculated?)

Without gas fees, Ethereum is more susceptible to spam from bad actors, including accidental or hostile infinite loops that could congest the network. Requiring gas fees and setting gas limits helps the network avoid certain security risks. 

Gas fees also motivate miners, or users who lend their time and computation power to solve cryptographic puzzles that verify Ethereum’s blockchain transactions, to validate blocks, an essential operation for any blockchain network.

 

What Is GWEI?

Gwei is one denomination of Ethereum’s native transactional token, Ether (ETH), equivalent to 1 billion wei. Wei is ETH’s smallest measuring unit, and is most importantly known as a way to denote gas prices. 

For each Ether, there is one quintillion wei. For each gwei, which stands for giga wei, there is one billion wei. Thus, for each Ether, there is one billion gwei. 

Think about Ether as a $100 bill. The denominations of that $100 bill include: $50 bills, $20 bills, $10 bills, $5 bills, $1 bills, quarters, dimes, nickels, and pennies. The $100 always remains the same, but without denominations, it would be difficult to price less expensive items. Imagine buying a piece of candy for one four-hundredth of a $100 bill instead of a quarter.

Gwei helps Ether price less expensive items. As the price of ETH continues to increase, gwei becomes an increasingly important way to measure Ether.

Below is a chart of all of Ether’s denominations:

Unit Name Wei Value Number of Wei
Wei (wei) 1 wei 1
Kwei (babbage) 1e3 wei 1,000
Mwei (lovelace) 1e6 wei 1,000,000
Gwei (shannon) 1e9 wei 1,000,000,000
Twei (szabo) 1e12 wei 1,000,000,000,000
Pwei (finney) 1e15 wei 1,000,000,000,000,000
Ether (buterin) 1e18 wei 1,000,000,000,000,000,000
 

How Are Gas Fees Calculated?

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Gas fees are calculated via a simple equation: gas units (limit) * (base fee + tip) = total gas fee.

Example: 21,000 [gas units - limit] * (100 [base fee] + 10 [tip]) = 2,310,000 gwei (0.00231 ETH) [total gas fee]. 

In the above example, if the user was sending 1.0 ETH to a friend, the total transaction cost to the user would be 1.00231 ETH, where 1.0 ETH went to the friend and 0.00231 ETH went toward gas fees (0.0021 ETH would be burned and 0.00021 ETH would go to miners).

Let’s talk about each of the variables in this equation.

 

Gas Units (Limits)

Gas units are limited per transaction on the Ethereum network. As mentioned previously, gas limits set a standard number of gas units (typically 21,000 for simple transactions) allowed per transaction, which helps keep the network secure from infinite loops or other security risks.

The more complicated a transaction is (i.e. interactions with smart contracts, buying and selling NFTs, etc.), the higher the required gas limit.

The number of total gas units per transaction are typically automatically entered into a user’s cryptocurrency wallet before the user signs (or approves) the transaction. 

In addition to gas limits for each transaction, there are gas limits for blocks. Before the London Upgrade, Ethereum had fixed-sized blocks, but when the network got congested during periods of high demand, users had to wait to transact on the Ethereum blockchain. 

After the London Upgrade, Ethereum switched to variable-sized blocks, which continually increase base fees if the standard gas limit of 15 million gas units is exceeded. The maximum block limit is 30 million gas units.

Block Number Included Gas Fee Increase Current Base Fee
1 15 million 0% 100 gwei
2 30 million 0% 100 gwei
3 30 million 12.5% 112.5 gwei
4 30 million 12.5% 126.6 gwei
5 30 million 12.5% 142.4 gwei
6 30 million 12.5% 160.2 gwei
7 30 million 12.5% 180.2 gwei
8 30 million 12.5% 202.7 gwei
 

Base Fees

Each transaction on the Ethereum network requires a base fee, which acts as a reserve price for gas fee calculations. If the base fee requirement is not met, the transaction is not included in the block. 

After the London Upgrade, base fees are calculated by the previous block, which makes them more predictable for users. If the soft maximum limit of 15 million gas units is exceeded on the previous block, the base fee increases by up to 12.5 percent on the next block. That process repeats itself for each block that exceeds the 15 million gas units limit. 

For example, if the base fee is 100 gwei and the previous block exceeded the gas limit for the block, the base fee would increase to 112.5 gwei for the current block. If the current block exceeded its gas limit, the base fee would increase again to 126.6 gwei. 

The base fee increases are exponential to avoid indefinite high block sizes. At a certain point, it will become too expensive for most users to send transactions, which will limit the demand on network resources. 

Base fees are burned once a transaction is completed. 

 

Priority Fees (Tips)

Priority fees, or tips, incentivize blockchain miners to include certain transactions in each block.

Before the London Upgrade, the total gas fee from all transactions included in a block went to miners. But after the London Upgrade, all base fees are burned. Now, miners are rewarded with priority fees.

Increasing the priority fee further incentivizes miners to process certain transactions before others. The users willing to pay the highest tip to miners will have their transactions preferentially executed as miners compete for limited resources.

Priority fees are typically automatically entered into a user’s cryptocurrency wallet before the user signs (or approves) the transaction. As previously mentioned, this can be increased to make the transaction higher priority to miners. 

 

Ethereum Gas Price (A Brief History)

Ethereum's gas prices are volatile. Below is a chart showing the average gas price (in gwei) on the first of the month for the last two years:

Date Gas Price
Jan 2020 11.7 gwei
Feb 2020 9.2 gwei
Mar 2020 10.4 gwei
Apr 2020 12.2 gwei
May 2020 13.9 gwei
Jun 2020 36.6 gwei
Jul 2020 47.4 gwei
Aug 2020 63.8 gwei
Sep 2020 445.9 gwei
Oct 2020 93.8 gwei
Nov 2020 59.6 gwei
Dec 2020 87.2 gwei
Jan 2021 66.6 gwei
Feb 2021 153.7 gwei
Mar 2021 124.9 gwei
Apr 2021 186.2 gwei
May 2021 59.7 gwei
Jun 2021 29.8 gwei
Jul 2021 25.1 gwei
Aug 2021 44.4 gwei
Sep 2021 117.2 gwei
Oct 2021 93.4 gwei
Nov 2021 167.0 gwei
Dec 2021 119.1 gwei
Jan 2022 100.6 gwei

Source: https://etherscan.io/chart/gasprice

 

How Will the London Hard Fork, ETH 2.0, and Proof of Stake Impact Gas Fees?

In August 2021, the London Hard Fork, also known as Ethereum Improvement Protocol 1559 (EIP-1559), provided a technical upgrade for the Ethereum network in order to help the blockchain protocol with scalability concerns. 

The London Hard Fork altered the network's gas fee procedure. Post-EIP-1559, all base fees on every transaction are burned, deflating the overall supply of Ether (ETH). Priority fees, or tips, are sent to miners as incentive for verifying transactions.

The London Hard Fork also switched Ethereum from fixed-sized blocks to variable-sized blocks, which allows blocks to fill past maximum capacity and issue a base fee percentage increase on the next block.

Overall, the London Hard Fork intended to standardize gas fees and make them more predictable for users.

EIP-1559 is a small part of the next major Ethereum upgrade called Eth2, Ethereum 2.0, and Serenity. Currently, the official Ethereum network stance is to simply call the upgrade a consensus layer upgrade. 

“The term Eth2 is being phased out in preparation for the merge,” the network’s official website reads. “After merging Eth1 and Eth2 into a single chain, there will no longer be two distinct Ethereum networks; there will only be Ethereum.”

To limit confusion, the community has updated these terms,” the website continues. “Eth1 is now the execution layer, which handles transactions and execution. The 2 is now the consensus layer which handles proof-of-stake consensus.”

Among other fixes and advancements, the upcoming consensus layer upgrade will move Ethereum from proof-of-work to proof-of-stake. Proof-of-stake should significantly lower gas fees while keeping the network secure and avoiding the high energy use required by proof-of-work.

In addition to moving to proof-of-stake, Ethereum will introduce shard chains, or sharding, which will help to process more transactions per second and decrease overall transaction fees. 

For more information, visit Ethereum’s official community guides and resources.

 

How to Save on Gas Fees

During periods of high network demand, gas fees increase and users are left with expensive transaction costs. When sending small amounts of Ether (ETH) to a friend or buying a low-cost NFT, gas fees can sometimes outweigh the total value of the transaction.

There is no secret way to save on gas fees, but here are a few tips and tricks that could help reduce the burden of transaction costs:

  • Wait for lower network demand
  • Adjust max fee limits on transactions
  • Transact on Layer 2 solutions
  • Understand how the platform works
 

Wait for Lower Network Demand

High network demand increases gas fees because the base fee is determined by the number of consecutive blocks that exceeded the 15 million gas unit block limit. When network demand decreases, gas fees also decrease because the base fee lowers.

If a user’s transaction is flexible, waiting until the network demand is lower can help save on gas fees. This tends to happen during weekends and in the middle of the night (for the United States). 

Users can also lower the priority fee, which will deprioritize a transaction and lower gas costs. The transaction will take much longer to process because miners are incentivized to complete transactions with higher priority fees first. But if the transaction is not time sensitive, there is no need to pay extra priority fees. Miners will complete the transaction when the network demand lessens.

 

Adjust Max Fee Limits on Transactions

A max fee limit (maxFeePerGas) is an optional parameter for each transaction. When specifying a max fee limit, the user indicates that they are unwilling to pay more than a certain amount of gwei to perform their transaction request. 

The max fee limit must exceed the total of the base fee and the tip or the transaction will fail. If the transaction fails, users risk losing part of the gas fee for the failed transaction.

If the max fee limit is not reached, the user will be refunded the remaining difference between the max fee and the sum of the base fee and tip. 

 

Transact on Layer 2 Solutions

Layer 2 scaling solutions are extensions of the Ethereum network and an attempt to decongest the blockchain by handling transactions separately from the mainnet. These protocols only interact with the main Ethereum network while the transaction is being validated, which leads to lower overall gas costs.

Layer 2 scaling solutions are not always a viable option. But here are a few popular choices to explore:

 

Understand How the Platform Works

Each platform interacts with the Ethereum network in different ways. For example, OpenSea has specific parameters for each NFT listing, and there are a few ways to limit potential gas fees by understanding how those parameters work.

For more information on how to lower gas fees on OpenSea, see How to Save Money When Selling NFTs on OpenSea.

Understanding how gas fees work and are calculated should help users to determine how to best interact with platforms and protocols to get the most out of their transactions.

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