Gas fees are what users pay when they make a transaction on the Ethereum network.
This fee goes to crypto miners for the computation needed to execute the actions associated with the transaction and to write them in the blockchain.
To measure this computational work, Ethereum uses an internal pricing unit called "gas." The amount of gas required for a transaction depends on its complexity:
- Simple transfers of ETH require minimal gas.
- Complex operations like interacting with smart contracts or decentralized applications (dapps) consume more gas due to increased computational demands.
Gas is paid for in Ether (ETH), Ethereum's native cryptocurrency. Users determine how much ETH they are willing to pay per unit of gas. Higher gas prices incentivize miners to prioritize those transactions, resulting in faster processing times.
Why does Ethereum need gas fees?
Since ETH's market value can change rapidly, directly pegging transaction fees to ETH would lead to unpredictable and potentially exorbitant costs.
For instance, if a transaction cost a fixed 0.1 ETH:
- When 1 ETH = $10, the fee would be $1.
- When 1 ETH = $1,000, the fee would surge to $100 for the same transaction.
Gas fees decouple transaction costs from ETH's price volatility. This ensures that users experience predictable fees regardless of ETH's market fluctuations.
How are gas fees calculated?
When making a transaction, your wallet usually gives you a rough estimate for how much gas it will cost.
For instance, if your transaction takes 21,000 gas and you’re willing to pay 5 Gwei (0.000000005 ETH) per one unit of gas, you will pay a total of 0.000105 ETH in fees which, at the current exchange rate, means a single US cent.
What is a gas limit?
Users first have the ability to set a gas limit. This functions as a maximum budget for the computational effort required to process your transaction.
Setting a gas limit allows anyone to specify the maximum amount of gas they are willing to spend on a transaction, and have several benefits:
- Cost control: Prevent overspending on transactions, especially when interacting with complex or potentially inefficient smart contracts.
- Transaction success: Increases the likelihood of a transaction being processed successfully.
- Gas refunds: If a transaction consumes less gas than a specified limit, the unused gas is refunded to the spender's wallet.
Calculating gas fees
The maximum transaction cost is determined by the following formula:
Gas price (price per unit of gas) x gas limit (maximum units of gas) = maximum cost (in ETH)
For example, if your gas limit is 20,000 units and the gas price is 200 gwei (a small fraction of ETH), your total fee would be 4,000,000 gwei, or 0.004 ETH.
Users can also include a tip (also known as a priority fee) to incentivize validators to prioritize their transaction.
Optimal gas price
While gas fees are unavoidable, there are ways to minimize costs and ensure you're getting the best value for your ETH:
- Monitor gas prices – Gas prices depend on network congestion and demand, an users can check gas track websites Ilike GasNow or Etherscan) to identify when the gas fees are lower. You can check Bitstamp’s “ What is Etherscan” article to learn more.
- Understanding transaction types – Simple ETH transfers have lower gas requirements than DeFi interactions and NFT minting.
- Layer 2 solutions – Scaling solutions, like Arbitrum and Optimism, process transactions off the main Ethereum blockchain while maintaining the security and decentralization of the network.
- Using centralized exchanges – Exchanges like Bitstamp exchange typically cover all fees incurred by crypto trading for free.
Ethereum Gas Essentials
- Gas fees are transaction fees on the Ethereum network. Users pay these fees to compensate for the computational work required to process their transactions.
- Gas fees are calculated based on gas limits and gas prices. A gas limit is the maximum amount of gas a user is willing to spend on a transaction, and the gas price is the amount of ETH paid per unit of gas.
- Users can optimize gas fees by monitoring gas prices, understanding transaction types, and utilizing Layer 2 solutions. Centralized exchanges may also offer gas-free trading.