What Are Gas Fees?

When you carry out a transaction with your local bank, you are required to pay a service charge to facilitate the trade. This means transferring some dollar amount from your bank account to a friend’s account can cost a few dollars in processing fees. Similarly, when you make a cryptocurrency transaction –deposit, receive, swap– on a blockchain network, a processing fee is charged to validate the transaction.

Consequently, most decentralized finance (DeFi) transactions take place on the Ethereum blockchain, which has transaction processing fees known as gas fee.

What is a Gas Fee?

Gas fees are fees paid to miners on a blockchain protocol for their transactions to be included in the block. This means the amount of money given to the miner as compensation for providing the necessary computing power to complete the transaction. A typical supply and demand mechanism governs how the system functions. Miners can decide to include transactions that pay more if there is a higher demand for transactions, forcing users to pay more for the quick and effective processing of their transactions. The gas fee protects against malicious transactions that aim to spam the network, adding an extra layer of security to the network and covering the cost of the computing power required to run the Ethereum blockchain. The Ethereum network is frequently criticized for its high fees and comparatively slow speeds. Hence, the formula used to determine Ethereum gas fees is dynamic because they vary wildly.

How is the Gas fee calculated?

The cost of gas is affected by several factors, such as the price of ETH at the time, the complexity of the transaction, and the volume of transactions occurring simultaneously with your transaction. The following formula is used to determine a transaction’s total fee on the Ethereum network:

Total fee = gas units (limits) x (base fee + priority tip)

  • Gas Units: This is the most you’re willing to spend on gas to complete a transaction. Different types of transactions on the Ethereum network require varying amounts of gas to complete successfully. As a result, you can control how much gas your transaction costs. However, it is critical to proceed cautiously.
  • Base fee: This is the minimal amount of gas needed to record a transaction on the Ethereum blockchain. The network determines the amount of gas necessary for a base fee based on the demand for a transaction to be included and the amount of available block space. The number of users interacting with the network at any given time determines how dynamically base fees are adjusted, regardless of the type of transaction.
  • Tip: Tips are extra charges designed to speed up your transaction. Because it gives miners a financial incentive to confirm your transaction before others, this fee is commonly referred to as a priority tip. A miner gets paid the priority fee for verifying a transaction with a priority fee attached. Miners prioritize completing a transaction with the highest tips attached to maximize profits because they can see which transactions include tips.

The standard currency for gas fees is Gwei, a lesser-valued version of Ether (ETH), the native token of Ethereum. A standard transaction requires a minimum of 21,000 units of gas multiplied by the price per unit in Gwei. Therefore, any digital wallet that accepts ETH and tokens based on Ethereum can be used to perform this calculation, and users can choose the transaction speed based on how much they are willing to pay.

What transaction requires a gas fee?

To complete any cryptocurrency transaction involving Ethereum, a gas fee is required. On the other hand, gas fees are not only applied to cryptocurrency transactions. For example, transactions involving Ethereum-based tokens on decentralized applications (dApps) require users to hold Ether for gas fee payments. Also, gas is needed to create and purchase non-fungible tokens (NFT) and other smart contract applications.

How to avoid a high Gas fee?

Computing power is a limited resource, so the amount of gas you’ll need to acquire to complete a transaction depends on the economic factor of demand and supply. In addition, many users compete to verify their transactions first when the network is busy with many transaction requests. As a result, the cost of verifying transactions increases, increasing the gas fee. However, gas fees cannot be avoided, but there are at least a few ways to avoid high costs.

Right transaction time

The base fees in the gas fee are a representation of the demand for Ethereum. So, carrying out your transaction at a specific period can aid in avoiding high gas fees. For example, your transaction can be carried out on the network when fewer people are using the blockchain to give a lower base fee and reduce the cost of your total gas fee. In addition, by lowering the base fee of your transaction, you could use less gas if you can find a time when there is less demand to interact with the Ethereum network. Hence, the best period for Ethereum transactions is weekends, when gas prices are at their lowest. On the other hand, weekdays are the worst period because these are the days that the network is the most heavily used, and gas prices are the highest.

Set transaction gas limit

Setting a limit tells the network the maximum gas fee you’re willing to pay for the transaction. The remaining portion of the maximum fee that wasn’t used in your total gas will be refunded once the Ethereum network completes the transaction. However, if the limit set is lower than what is required to complete your interaction, your transaction will be reverted, and you will lose the gas fee.

The Takeaway

A crucial component of the Ethereum blockchain network is gas fees. To put it simply, the gas is used by the ethereum virtual machine (EVM), the cryptocurrency’s digital engine, to enable decentralized applications to run and automatically execute smart contracts safely and securely. They serve as rewards given to miners who contribute to the smooth operation of the network and add another layer of defense against spam and malicious users.

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