If you’ve ever used a decentralized application or exchanged cryptocurrencies, you’ve likely come across gas fees!
Well, Gas is a unit of measurement that crypto exchanges or blockchain projects use to calculate fees needed to execute transactions.
Every transaction on a network requires a certain amount of this gas to be completed.
To make an analogy, imagine you’re planning a road trip from one city to another.
You’ll need to fill your car with gas to make the journey, right?
The amount of gas you need will depend on several factors.
These factors include the distance you’re traveling, the weight of your vehicle, and the terrain you’ll be driving on.
These all contribute to how hard your car engine has to work to get the job done - to take you to your destination.
In the world of cryptocurrencies, gas fees work in an analogous way.
The amount of gas you need will depend on several factors, such as how complex the transaction is or the current network congestion, which is how many people are trying to make transactions at the same time.
These factors all come together to determine how much computation is required to get the job done - to complete your transaction.
Why are Gas Fees Important?
Basically, a blockchain network relies on gas fees to maintain its security and efficiency.
These fees help incentive miners, who are users running nodes on the network, to validate transactions and help secure the network.
Another primary reason why gas fees are crucial is that they help prevent spam and other malicious activity on the network.
Without gas fees, bad actors could flood the network with fake transactions, causing congestion and making it difficult for genuine transactions like yours, to be processed.
In this way, gas fees make it much harder for malicious actors to disrupt the network, which helps maintain the blockchain’s security and integrity.
Additionally, in a proof-of-work blockchain like Ethereum, miners must solve intricate mathematical problems to validate transactions.
In return, the miners earn rewards in the form of Ethereum tokens.
So, Gas fees also provide an additional layer of compensation for miners.
Gas fees also play a crucial role in prioritizing transactions on the network, namely, who gets served first.
When you put through your transactions, you can specify a gas price and limit, determining its processing speed.
Naturally, transactions with higher gas fees get processed faster than those with lower fees.
This system ensures that if you are willing to pay more for faster transactions, you have a better chance of processing their transactions quickly.
So now you understand a bit more about what gas fees are for, how are they actually made?
How are Gas Fees Decided?
As mentioned, gas prices vary depending on the current demand for transactions on the network.
When the network is busy, gas prices can skyrocket, and you might end up paying a lot more than you anticipated.
On the other hand, when the network is less busy, gas prices can be lower and when this happens, you might be able to get your transaction processed for a lower fee.
While making Ethereum-based blockchain transactions, you might have noticed something called gwei.
This is how Gas is actually denominated, which is a fraction of an Ethereum token.
A gwei is a very small unit of Ether, representing one billionth of an Ether token, and it’s used as a way of measuring the price of gas.
The higher the amount you allocate to a transaction, the faster it will be processed.
We’ve mentioned a few reasons why gas fees can skyrocket, but are there any others?
Why Else can Gas Fees be High?
As I touched on before, network congestion is one of the primary factors that can cause gas fees to be high.
As more users submit transactions to the network, the demand for processing increases.
Miners must prioritize which transactions to include in the next block they mine, which often leads to a kind of bidding war between people wanting to make transactions.
Basically, by increasing the gas price you allocate, you incentivize miners to include your transactions in the next block.
What it means though, is during periods of high network congestion, gas prices can increase dramatically, making it pretty expensive to execute even small transactions.
Another crucial factor that can impact gas fees is supply and demand.
As the popularity of cryptocurrency increases, more users are transacting on the network, creating a higher demand for processing power, which is limited by the number of miners on the network.
This imbalance between supply and demand can drive up gas prices.
A further reason is that miners require computing power and energy to process transactions and maintain the network.
As the network’s cost increases, miners may increase their fees to cover their expenses, which in turn can contribute to higher gas fees.
These reasons seem pretty obvious once the basics are understood, but there are some blockchain-specific features which can be pretty unexpected too.
What does 'Gas Used' and 'Gas Limit' mean?
Well, the concept of Gas Used simply means the actual amount of gas consumed during the execution of the transaction or smart contract.
The amount of Gas Used can vary depending on the complexity of the transaction, like whether smart contracts are involved.
Gas limit is another important concept - it’s the maximum amount you are willing to spend on a transaction.
If the transaction requires more gas than the specified gas limit, the transaction will fail.
This is especially tough because you will still be charged for the gas you used!
To calculate the transaction fee, you multiply the gas price by the amount of gas required to execute the transaction.
For example, if you set the gas price at 10 Gwei and the gas limit at 21,000 units of gas (the amount of gas required for a standard transaction), your transaction fee will be 0.00021 Ether (10 Gwei x 21,000 gas).
With all these fees, it can seem a bit overwhelming but did you know it’s possible to reduce gas fees too? How does that work?
How Can I Save on Gas fees?
One effective way to save on gas fees is to wait for periods of low network congestion before submitting transactions.
By monitoring the network and waiting for less congested periods, you can often save a lott on gas fees, particularly for non-urgent transactions.
Another strategy for saving on gas fees is to optimize transactions by reducing data in each transaction.
The more data a transaction contains, the more computational resources it requires to process, which can result in higher gas fees.
Using decentralized applications (dApps) that offer gas fee optimization features can also help save on gas fees.
Many dApps include features that allow you to select the gas price and gas limit for transactions.
Additionally, some dApps offer gas fee prediction tools.
Based on current network activity, these tools estimate the gas fees required for a transaction.
Finally, using a cryptocurrency wallet that supports multiple blockchain networks can provide users with cost savings.
Layer-2 solutions like Polygon (previously Matic) or Optimistic Ethereum, are specifically designed to reduce gas fees and speed up transactions and can be switched to in times of high congestion.
You can use the most cost-effective options by switching between different networks based on current gas fees and network activity.
Conclusion
In conclusion, understanding gas fees is crucial when interacting with blockchain networks, especially when executing transactions.
Gas fees represent the effort required to process transactions, and they change based on factors like network congestion, transaction complexity, and supply and demand.
By understanding how these fees work, and the language associated with them like gas price, gas used, and gas limit, you can better navigate and even reduce your costs within the network.
Additionally, using decentralized applications (dApps) and Layer-2 solutions offer even more opportunities for optimizing your gas fees.
So, while blockchain may feel like a foreign landscape at first, with knowledge and a bit of planning, you can use it smoothly, making the most out of your crypto journey.
That’s it for this article - I hope you could learn something and I’ll talk to you soon!
