Transactions on the Ethereum Blockchain are made possible by small fees that share a name with the substance that makes cars move and lights up cookers.
The Ethereum Blockchain is the second most popular blockchain after Bitcoin’s and has the second most valuable cryptocurrency globally.
On the blockchain, there is a compulsory cost for every transaction called gas fees. Gas fees are like special donations calculated based on the amount of computer “brainpower” that a task on the blockchain demands.
Simply put, the more complex a task on the Ethereum network is, the more the gas fees would be.
With more than 3,000 decentralised applications (DApps) built on the network, the Ethereum Blockchain has always suffered congestion.
The gas fees serve as an added incentive for validators to quickly verify your transactions before others because of the extra crypto they will get as a reward.
Think of gas fees as the tip you give to a valet or waiter at a crowded restaurant to find you a good parking spot or table.
How gas fees work
The Ethereum Blockchain receives thousands of validation requests per hour and only has a limited number of persons willing and able to validate them.
This overwhelming number of transactions and limited supply of validators forces validators to choose and pick the transactions they want to approve as all the transactions cannot be verified simultaneously.
All the unprocessed transactions are kept in a blockchain safe known as a ‘mempool’, a combination of memory and pool.
Validators can then go in and pick the transactions they want to verify. They can select based on the fees being offered.
There is no fixed price for gas fees; it is left to both parties to choose a price that works for them. However, most users complain about the constant fluctuation in how much they pay as gas fees.
How are gas fees calculated?
Because gas fees are usually small and not up to the size of one ETH, they are calculated in terms of gwei, a small denomination of one ETH unit.
One gwei is equal to 0.000000001 ETH. The word ‘gwei’ itself means ‘giga-wei’, and it is equal to 1,000,000,000 wei. Wei is the smallest unit of ETH.
The total fee you pay for transactions is calculated with the given formula according to the latest London upgrade of the network in August 2021.
Total Fee = Gas unit limits * (Base fee + tip)
The minimum amount of gas an Ethereum user is willing to pay for a transaction. Users can decide how much gas they want to spend for a transaction; however, what you’re doing on the network determines the minimum amount of gas you need to complete it.
This is the minimum amount of gas necessary to verify and add a transaction to the Ethereum Blockchain. The base fee is usually based on the network’s congestion level and it is automatically adjusted according to the number of users interacting with the network at the given point in time.
This is the additional fee Ethereum users pay to validators to prioritise their transactions. It serves as an incentive for the validators to quickly confirm the transaction of some users before others.
The problem of high gas fees has prevented Ethereum from scaling properly and reaching its full potential as a versatile open-source blockchain.
Therefore, the network’s founder, Vitalik Buterin, is working towards reducing gas fees and general power consumption in the transaction process by moving from its current system to a proof of stake system like Solana, where users stake ETH and get rewarded when a new block is added to the blockchain. The proposed update is called Ethereum 2.0.