Introducing the Ethereum Gas Fees:: What Are They and How Do They Work?
Understanding Ethereum fees and the factors that impact your transactions is an essential aspect of navigating the Ethereum network. So, if you’re new here, let’s start from the very beginning.
Ether is the second-largest cryptocurrency. At the same time, Ethereum is the most popular network for smart contract development. As a result, millions of users hop on the network daily, accumulating billions of dollars worth of transactions. Of course, these transactions differ greatly – they all come in different forms and sizes and have different purposes. Still, they are all bound together by the notorious Ethereum gas fees.
In simpler terms, gas fees are nothing more than the fees for initiating transactions on the Ethereum blockchain. You could even say that paying gas fees is a decentralized equivalent of paying Visa a monthly fee for using its payment card.
If you want to initiate transactions on the Ethereum network, these fees are unavoidable, I’m afraid. More importantly, they can only be paid in ETH.
Photo illustration: Freepik
The Ethereum gas fees have a purpose, though. The Ethereum network imposes fees so that it can pay off the network validators for their hard work and computing power. Network validators are the backbone of every decentralized ecosystem, as they’re essentially securing the blockchain and network.
If the validators didn’t have any benefits from participating in the network improvement, there would be little to no reason to put all your crypto in a staking pool just to become one. And without validators to keep the game as fair as possible, the network would suffer. That said, Ethereum fees are an essential aspect of the ecosystem, as part of them goes directly to validators on Ethereum.
Not all fees are distributed among the Ethereum network validators though; they just earn a fraction of the total sum. Most of it is burned, aka sent to a wallet without a recovery phrase so that no one, not even Vitalik Buterin himself, could put it back in circulation. But wait. That’s good practice, at least in Ethereum’s case, as it keeps the currency deflationary and the investors hooked.
What Is Gwei and What Are You Supposed to Do with It?
Before you learn how to calculate the Ethereum gas fees, there are a few things to keep in mind:
- Ethereum gas fees are always paid in Ether
- Ether has several denominations, with the most important one being gwei
- Ethereum gas fees are always denoted in gwei
- One gwei = 0.00000001 ETH
Just like fiat currencies, crypto can be and is often broken down into smaller units. This happens because a smaller unit of a cryptocurrency is a useful means of exchange. Although there are a few denominations of Ether, gwei is the most popular one because it’s used for calculating fees.
Now, gwei, short for Gigagwei – a merger word of Wei (smallest Ether unit) and giga-, a unit prefix in the metric system denoting a factor of 10⁹ – is a unit of currency equal to one billionth of an Ether. It’s one of the seven Ether units, but this is the most important one, and it would be good to memorize it, especially if you want to dip your toes into the Ethereum ecosystem.
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All of this is important because although you pay fees in Ether, they are denoted in gwei. Think of Ether as a dollar bill and gwei as a penny – but for some reason, you always end up paying in pennies when grocery shopping.
You could always rely on an Ethereum gas fee calculator to tell you how much money you’ll spend on fees, but it’s always better to know just in case you need to take out a sheet of paper and calculate it manually.
Speaking of manual calculations, let’s see how Ethereum gas fees vary and how to put a figure on your Ethereum-based shenanigans.
How to Calculate Ethereum Gas Fees?
Before the London upgrade, which happened in August 2021, users didn’t have much fun calculating Ethereum gas fees. They pretty much had to take into account the network’s congestion and then use that information to assume the cost of their transactions. That is because, well, the Ethereum gas fees tend to skyrocket when the network is overwhelmed by a surge of users, giving the privilege of faster processing to those willing to pay the most.
That said, the formula for ETH gas calculations prior to the London upgrade looked something like this:
Gas units * Gas price per unit = ETH gas fee
So, for example If you set up the gas limit to be 20,000, and the price per unit was 200 gwei, your ETH gas fee calculation would look something like this:
20,000 * 200 = 4,000,000 gwei
That makes it exactly 0.004 ETH. These numbers don’t change with market fluctuations. Instead, the fiat-to-crypto value of your fee shifts, following the real market value.
But this approach to ETH gas calculations was prevalent before the London update.
One of the main objectives of the London update is to eliminate this uncertainty from the equation. Users shouldn’t guess the price but should instead be able to get a clearer picture of how much they ought to spend when initiating transactions.
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The London upgrade, which essentially introduced EIP-1559 transaction type, changed the way the Ethereum network processes and calculates network transaction fees. They did that by introducing a pre-defined gas fee base for every block, entirely changing the previous gas fee equation. So, now instead of guessing the gas price per unit, you calculate your fees based on a fixed pre-block base fee and the priority fee, which you set yourself. It looks something like this:
Gas units (limits) * pre-defined fee (base fee (fixed) + priority fee) = ETH gas fee
So, if the gas limit is 21,000, your base fee is 10 gwei, and you add another 2 gwei for your priority fee to avoid long waiting times, your gas fees would amount to 0.00252 ETH. (21,000 * (10+2) = 252,000 gwei or 0.00105 ETH). Makes sense, right?
How to Reduce Ethereum Gas Fees?
If you’re looking for a magical solution that would significantly reduce the gas fees, you won’t find it. But, a man can hope, can’t he?
Still, some strategies can help you cut a fraction of your costs, at least temporarily. Here are some of the most popular strategies to implement on your journey into the Ethereum ecosystem:
- Optimize your transaction timings: As you already know, high gas fees are a result of the Ethereum network congestion. However, activity spikes vary throughout the day. If you’ve been initiating transactions on the Ethereum blockchain, you probably noticed that fees are significantly lower during certain times. Of course, scouting for the best opportunity to initiate transactions can be daunting, but if your goal is to save money, this strategy could be a good start. Luckily, you don’t have to do it manually, as EthereumPrice is a great tool for network congestion predictions.
- Organize your transactions: Ethereum gas fees vary based on the transaction type. That said, you could lower the gas fees by sorting your transaction by type and executing similar ones together.
- Consider using dApps offering discounts on ETH gas fees: Many Ethereum-based dApps offer gas fee subsidies or discounts, making them an excellent choice for users wanting to support the ecosystem and still benefit from it.
Scalability, The Merge, and Sharding: Would Any of the Upgrades Bring Down the Costs?
Contrary to popular belief, The Merge, which is the most significant hard fork in Ethereum’s history, wasn’t initiated to lower the Ethereum gas prices. Yes, it was the first step toward improvement, but the hard fork gravitated more toward scalability.
Ethereum was a Proof of Work (PoW) blockchain before The Merge, and it had serious issues with scaling. The network wasn’t built to support millions of daily users and would often be congested due to user influx.
What I mean by that is that Ethereum couldn’t process large transaction amounts. As a result, users would have to wait to join the network, and those who wanted to pay more for a faster service could do so.
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Although that’s exactly what you’re doing now as well, at least The Merge paved the way to a real solution that would once, and hopefully, for all, lower the notorious ETH gas fees. The Merge is a predisposition for sharding, a type of data partitioning that should, at least in theory, reduce the gas fees in the Ethereum ecosystem.