Ethereum has become one of the most popular cryptocurrencies and blockchain platforms in recent years. However, one aspect of Ethereum that often confuses new users is gas fees. In this beginner's guide, we will explain Ethereum gas and gas fees in simple terms.
What Are Ethereum Gas Fees?
Ethereum gas fees refer to the fee, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform.
In order to perform any action on the Ethereum network, you need to pay a certain amount of "gas". Gas is priced in small fractions of the cryptocurrency Ether (ETH). The amount of gas required depends on the complexity of the action you want to take. Simple transactions like sending ETH from one wallet to another require less gas than executing a smart contract.
Gas fees are paid to Ethereum miners as an incentive for them to add your transaction to the blockchain. The miners have to expend computing energy (literally spend gas) to process and validate your transaction. So the gas fee compensates them for that work. The more complex the action, the more gas it requires, and the higher the fee.
Why Do Gas Fees Exist?
Ethereum gas fees exist to prevent network spamming and abuse. Without gas fees, users could execute an infinite number of transactions and slow down the network. Gas fees ensure that people use the Ethereum blockchain responsibly and minimize unnecessary transactions.
Gas fees also help determine the priority of transactions. Users can set a gas price they are willing to pay for each transaction. Miners will prioritize transactions with a higher gas price. During times of network congestion, setting a higher gas price can help get your transaction processed faster.
Finally, gas fees act as a critical anti-DDoS measure. If transactions were free or extremely low cost, malicious actors could generate a flood of requests to disrupt the normal functioning of the Ethereum network. Gas fees discourage such DDoS attacks by imposing a real financial cost on the attacker.
How Are Gas Fees Calculated?
Ethereum gas fees are calculated based on two factors:
- Gas Price (Amount you are willing to pay per unit gas)
- Gas Limit (Maximum units of gas to use for the transaction)
Gas Price is set by you, the user. The Gas Limit is determined by how complex the transaction is. For simple transactions, the gas limit might be 21,000 units. For a complex smart contract function, it might be 200,000 units or more.
To calculate the maximum total gas fee for a transaction:
Gas Fee = Gas Price x Gas Limit
- Gas Price: 20 Gwei
- Gas Limit: 50,000
- Gas Fee = 20 x 50,000 = 1,000,000 Gwei (0.001 ETH)
So the maximum you would pay for this transaction is 0.001 ETH. The actual fee may end up lower than the maximum depending on the actual gas used.
Tips to Reduce Ethereum Gas Fees
Here are some tips to reduce the amount you pay in Ethereum gas fees:
- Set a reasonable gas price - Don't overpay. Online tools can recommend safe low gas prices.
- Reduce the number of transactions - Bundle payments into one transaction instead of sending separately.
- Use wallets that allow you to set precise gas fees - Many wallets estimate gas which can lead to overpaying.
- Time your transactions wisely - Gas prices are lower during off-peak hours for the Ethereum network. Weekends and late at night tend to be cheaper.
- Use Layer 2 rollups - These shift transactions off the main Ethereum chain but retain security. Transaction fees are much lower.
- Upgrade to Ethereum 2.0 - The upgrade will bring improvements like sharding that will significantly reduce gas fees.
The Importance of Understanding Gas
As an Ethereum user, having a clear understanding of gas and gas fees enables you to optimize your transaction costs. You can avoid overpaying and prevent failed transactions due to incorrect gas settings. As Ethereum advances, gas mechanics may evolve. But the core principles will likely remain valid for the foreseeable future. Mastering gas is a key step to level up your Ethereum knowledge.
"After banging my head against the wall with failed transactions and ridiculously high gas fees, I finally decided to buckle down and learn all about how Ethereum gas works. While it took a bit of effort up front, it was 100% worth taking the time to actually understand gas. Now I can use Ethereum smoothly and avoid the common beginner mistakes."
- A list containing some key takeaways:
- Gas fees are payments to miners for processing transactions and contracts
- Setting gas price and limit determines the maximum fee you'll pay
- Higher gas prices can help prioritize transactions during congestion
- Reducing unnecessary transactions and setting precise gas settings saves on fees
- Gas mechanics are complex but worth understanding as an Ethereum user
Now that we have covered the basics of Ethereum gas and fees, you may be wondering...
How Much Are the Current and Historical Ethereum Gas Fees?
Ethereum gas prices and fees have varied widely over time. Here are some key stats on historical gas costs:
- Average gas price on September 1, 2021: ~62 Gwei
- All-time high gas price: ~3,500 Gwei on February 23, 2021
- Average gas price over 2021: ~116 Gwei
- Average transaction fee on September 1, 2021: $14.73
- All-time high average fee: $71.72 on February 23, 2021
In periods of high network congestion, like during the height of the 2021 NFT boom, gas fees spiked dramatically. This pricing is driven by demand and supply economics. When demand is high, fees naturally rise as users compete to get their transactions processed faster.
However, even during calmer periods, Ethereum gas fees remain high compared to other blockchains. For example, a typical Ethereum transaction fee is rarely below $10, while Bitcoin fees can be under $1. This is due to Ethereum's unique architecture and extensive smart contract functionality.
How Can Ethereum Become More Scalable and Reduce Gas Fees?
To significantly improve scalability and reduce gas costs over the long term, Ethereum is transitioning to a "Proof of Stake" consensus model via the Ethereum 2.0 upgrade. This will allow sharding, parallel processing of transactions via sidechains attached to the main Ethereum blockchain.
In addition, Layer 2 scaling solutions like rollups and state channels will take pressure off the main chain and provide order-of-magnitude gas discounts for users. Plasma sidechains are another scaling approach in active development.
For the average user, Layer 2 solutions integrated into consumer products will be the most convenient way to enjoy low gas fees while retaining Ethereum's security. So watch for exchanges, wallets, NFT platforms and more launching Layer 2 access over the coming years.
How Do Ethereum's Fees Compare to Other Blockchains?
Ethereum gas fees are generally higher than competing smart contract platforms like Binance Smart Chain, Polygon, Solana etc. Here's a quick comparison of average transaction fees:
- Ethereum: $10-$20
- Solana: Around $0.00025
- Polygon: $0.03 - $0.08
- Binance Smart Chain: $0.10 - $0.50
However, Ethereum offsets higher fees with greater decentralization, censorship-resistance, dev community and security. As scaling solutions launch, Ethereum will aim to match the low fees of competitors while retaining its unique value proposition.
Should I Wait for Lower Gas Fees Before Using Ethereum?
For new users eager to explore Ethereum, constantly waiting for lower gas is not ideal. Ethereum fees are a complex, ever-changing landscape. But fortunately as a beginner, you can enjoy most of what Ethereum offers without exorbitant fees.
Here are some tips to use Ethereum smoothly even when gas prices are high:
- Explore Web3 wallets like MetaMask with test networks - Requires no real ETH and no gas fees
- Claim airdrops and free NFTs to enjoy Web3 apps for free
- Use Layer 2 platforms when possible to avoid mainnet gas fees
- Don't send ETH/ERC-20 tokens directly unless necessary
- Leverage sidechains like Polygon for cheaper transfers and transactions
- Remember, you can't time the market perfectly - start small and smart
While gas fees are still a pain point, they should not scare you away from the amazing world of Ethereum and Web3. With the right strategies, you can dip your toes in for free and have tons of fun learning.