Ethereum gas fees explained

As the world moves to decentralized finance (DeFi), more people are utilizing the Ethereum network, making Ethereum's gas fees a topic of discussion in the WEB 3 space. The utility of Ethereum's ecosystem has resulted in higher gas fees and increased congestion on the network.

Understanding Ethereum gas fees

Gas is the measuring unit for the computational effort required to execute specific operations on the Ethereum network. In the Ethereum ecosystem, stakers are incentivized to maintain the network with tasks such as validating transactions.

The rewards for participating and contributing to the Ethereum network are paid in gas fees. To avoid accidental loops or other computational waste, the Ethereum network has set a limit of steps of code execution. This fundamental unit of computation is referred to as ¨gas¨.

Since cryptocurrency transactions require computational resources, every transaction requires a fee. Since there are only a limited number of participants, the network can approve a limited amount of transactions. Transactors bid with higher gas limits to prioritize their transactions.

As a result, it provides a higher incentive to validators. Gas fees also act as a security mechanism for the network. It prevents congestion caused by malicious actors or spam network transactions. They're required to maintain the quality of transactions on the network.

The importance of gas limits

Gas limits are hard caps on user fees applied to approve Ethereum based functions like sending Ether from one wallet to another or executing smart contracts. It refers to the maximum capacity a wallet allows to charge for fees on the network. As a security layer, it prevents transactions from overcharging due to congestion or anomalies.

Important terms to understand before setting gas limits

Base fees

Ethereum transactions are applied to blocks to verify them. Every block has a base fee, which is the minimum cost of submitting transactions. The gas fees added to a transaction must at least equal the base fee for it to get included in the block.

Tip/Priority fees

In addition to base fees, a tip or a priority fee for validators can be added to the gas fees. These fees are non-mandatory extra costs added by users to fasten the verification process. Tips encourage miners to prioritize transactions on the block faster.

Max fees

Max fees refer to Max-Fee-Per-Gas, which are optional perimeters for gas limits. Max fees are the maximum limit users are willing to spend on gas fees. The max fee should exceed the total base fee and priority fee. The difference between the both gets refunded to the user.

Calculating fees

Applications running Ethereum transactions can upgrade to automate transaction fees. The suggested fees include the base fee and tips predicted by the system. This makes it easier for users to execute transactions without the complexity of calculating the required fees.

Gas Prices

Ethereum gas prices have fluctuated with its utility and the innovation of dApps (decentralized applications) building on top of the network. There are multiple factors thyat affect gas fees:

• Function complexity:

The complexity of the function submitted on the Ethereum network affects the validation time. The amount of effort contributed by validators to execute the task on the network determines the initial fee charge. Multiple functionalities increase complication, requiring more computational power and higher gas fees.

• Transaction Urgency:

The increased utility of Ethereum-based dApps has created an urgency for validation. Layer - 2 solutions on the network help to resolve this. Nevertheless, the Ethereum blockchain still settles the transaction.

• Network status:

The Ethereum network has limited validators, and low TPS (transactions-per-second) makes it prone to congestion during busy periods. The system is maintained by gas fees, which settle urgent transactions with higher priority fees first. The network status determines gas prices, as a congested network repeatedly settles bids with higher tips before picking up transactions with base fees or no tips.

How is Ethereum gas fees calculated?

Gas fees are made up of two components: the gas price and the gas limit. When a user initiates a transaction on the Ethereum network, they specify the amount of gas they are willing to pay for its execution. The maximum amount the user is willing to spend is the gas limit, and the base fee rate is how much it'll cost per unit of gas.

The total gas fees can be calculated using the below formula.

Gas fees = Gas limit x (Base fee + Tip).

The total gas fee for a transaction can be calculated by multiplying the gas limit by the sum of the base fee and tip fee (if applied). It considers the minimum fee cost, i.e., the base fee and the priority fee or tips added to the transaction to make it faster.

e.g., if a transaction has a gas limit of 100,000 and a gas price of 50 Gwei (0.000000050 ETH), the total gas fee would be 0.005 ETH (100,000 * 0.000000050).

Even with correct calculations, the final gas fee can vary. The base fee fluctuates, and the price can change depending on the demand of the network. If the network is congested, transactions with higher gas fees will be prioritized. To execute urgent transactions, users increase the gas price to prioritize their transaction.

Ways to reduce Ethereum gas fees

Ethereum's current limitations on speed have been the core reason for network congestion. The upcoming scalability upgrades will eventually address the high gas fee issues; meanwhile, there are a few ways to reduce it.

Monitoring demand and network congestions

Users can monitor the Ethereum network to understand its status. When demand is high, the network gets congested. One can check pending confirmed transactions on Etherscan or mempools before carrying out transactions.

Sync timings

Ethereum gas prices fluctuate aligned with the volatility of its underlying asset Ethereum. One can study Ethereum's price action and events to estimate when gas fees will be their lowest.

Explore dApps

Utilize the benefits of dApps built on Ethereum that provide offers on transacting and participating in their ecosystem. These decentralized applications offer lower entry barriers for newer traders by eliminating high gas fees and providing rebate offers.

Gas tokens

Users can earn ETH and create gas tokens by removing storage variables on the blockchain. When gas fees are low, one can mine gas tokens and utilize them later to pay gas fees or exchange them for Ethereum.

Layer-2 solutions

Layer-2 solutions on the Ethereum network are alternate solutions to deal with high gas fees. These complementary platforms enable users to scale up their transactions, zk-roll ups, and side chains, which results in lower gas fees and faster transaction settlement times.

Future of ETH gas fees

High gas fees occur during high levels of congestion on the Ethereum blockchain. Executing functions on Ethereum's network consumes computational power and requires gas fees to incentive validators to carry out the task.

The fees are used to pay for calculations, storing or manipulating data, or transferring tokens; each consumes different amounts of "gas" units. With the growing complexity of dApp functionalities, a smart contract's operations also increase as each transaction consumes more space in a limited-sized block.

Upgrades to introduce improvements and advancement in Ethereum's infrastructure may address rising ETH gas prices and congestion on the network.

FAQs

How do I choose my ETH gas limit?

Users can calculate the appropriate required gas limit by monitoring the base fee on Etherscan's gas tracker.

Why is the ETH gas limit so high?

Due to increased network activity, ETH gas limits are set high. Users can set gas limits as per requirements. Non-utilized gas fees are refunded via EVM.

How much is one gwei?

1 Gwei equals 0.000000001 ETH, which is one-billionth of an Ethereum.

How can I avoid high ETH gas fees?

Users can monitor network congestion and transaction timings before placing execution orders. Exploring offers on dApps, and using Layer-2 solutions can also help avoid high ETH gas fees.

How is the gas fee calculated?

The total gas fee for a transaction can be calculated by multiplying the gas limit by the sum of the base fee and tip fee (if applied). The total gas fees can be calculated using the formula: Gas fees = Gas limit x (Base fee + tip).