Cryptocurrency Explained: Gas Fees FAQ
If you've made a transaction on the Ethereum blockchain in the last few months, then you probably have been shocked by the extra price tag tacked on called a gas fee. If you are wondering what a gas fee is and why it is so expensive, you are in the right place. Today, we're breaking down the basics of gas fees, how they are calculated, and what the future holds for Ethereum-based transactions.
Gas is the fuel that runs the Ethereum network.
The price of gas is determined by supply and demand and the Ethereum network has been more popular than ever, leading to high gas fees.
Gas fees are calculated as follows: Gas Fee = Gas Cost x Avg. Gas Price x ETH Price
What Are Gas Fees?
Gas fees are required to execute a transaction on the Ethereum blockchain network successfully. Specifically, gas is a unit used to measure the computational effort necessary to perform specific actions on the blockchain. It is called gas because, just like cars need gasoline to run, the Ethereum network needs gas to keep operating. Ethereum uses gas to fuel transactions.
Gas considers the computational difficulty, bandwidth, and space needed to calculate the necessary fees to complete each transaction. These fees are what incentivize Ethereum miners to put forth the required work to maintain the network. Miners use gas to set the minimum price they are willing to accept to process transactions.
The exact price of gas is determined by supply and demand. It all depends on how many people are trying to make transactions and how much they are willing to pay to complete their transactions faster.
Why Are Gas Fees So High?
Over the last few months, the Ethereum blockchain has been more popular than ever. It is used to make Ether transfers, facilitate smart contracts in DeFi, mint NFTs. Plus, the Ethereum blockchain supports all ERC-20 tokens like Chainlink and USD Coin, which also congest the network.
Any operation executed on Ethereum consumes gas. The gas model is based on an auction system where users can outbid other users to complete their transactions faster. Miners are incentivized to select transactions with the highest gas fees first as that is most profitable. As Ethereum's technology becomes more popular and finds more users, the more expensive gas becomes the prices according to the principles of supply and demand.
How are gas fees calculated?
Gas fees are determined by several factors, including the current price of ETH, the complexity of the transaction, and the number of people transacting at the time of your transaction.
Gas is measured in GWEI. One GWEI is one-billionth of an Ether or 0.000000001 ETH. So, if something costs 0.000000001 ETH, you can say it costs 1 GWEI. You can think of GWEI like the cents to Ether's dollars.
The minimum amount of gas required to process a transaction is 21,000. To calculate your gas fee, you must multiply that number by the average gas cost noted in GWEI. Most wallets that support ETH and Ethereum based tokens will allow you to select the speed of your transaction and calculate the required amount of GWEI necessary to process your request.
Gas fees are determined by multiplying the transaction cost (21,000 gas) by the price of gas, noted in GWEI.
To better understand the way Gas fees are calculated, we can compare it to a trip to the gas station where one gas is equal to a gallon of gasoline. The average gas price can be equated to the dollar amount we pay per gallon listed on the pump. If we need to buy 5 gallons of gas, we multiply that by the price listed on the pump. The total at the end is our gas fee.
Essentially, every transaction requires 21,000 gallons of gas, and the price of gas per gallon on April 1, 2021, was 191.87 GWEI. Multiply that by the cost of Ether, and your total is $7.93 worth of Ether.
You can find the average Gas price on any given day here.
How Does CoinFlip Calculate Gas Fees?
Similar to most popular Ethereum wallets, CoinFlip calculates gas fees for you. We multiply the gas cost with the average gas price and multiply that by CoinMarketCap's ETH USD price to charge a flat fee. Our system updates every few minutes with the latest median gas price, so you can be sure you are always getting the most timely prices.
Do Other Cryptocurrencies Besides ETH Have Gas Fees?
All operations on the Ethereum blockchain require gas fees, which include tokens that use the Ethereum network known as ERC-20 tokens. Popular ERC-20 tokens are Chainlink, Binance Coin, and USD Coin. While ETH transfers require 21,000 gas, ERC20 requires 65,000 gas, making transacting with these tokens quite expensive.
When Will Gas Fees Go Down?
Ethereum developers are working on implementing updates that will make the network run more efficiently. While none of these updates specifically address the price of gas fees, a more efficient system is thought to make gas fees more reasonable by lessening the load on the network at any given time. One such update occurred in April, known as the Berlin Hardfork. Another, the London Hardfork, is expected to take place this summer.
Ultimately, the Ethereum network will be switching to a new Proof-of-Stake model by 2022. This model should reduce the high consumption of expensive electricity and reliance on specialized hardware and hopefully lower the cost of computation power required per transaction. Proof-of-Stake will allow anyone or group of people with 32 ETH to stake them and become a validator responsible for processing transactions, proposing new blocks to be added to the chain, and storing data.
When the price of Ether drops, as we have seen over the last week, gas fees will eventually decrease due to less activity on the network. A trick for saving on gas fees is making your transaction during times when the network is slow. To find the most optimal time to complete your transaction, check out GasNow.org.
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