Whether you have been active in the crypto space for some time, or have just started to dip your toe in the water, one term you’re likely to have come across is “gas fees”. No doubt, like myself at the beginning, you may have found them confusing or just irritating. No matter if you are purchasing an NFT, swapping tokens on one of the many decentralised exchanges or transferring cryptocurrency between wallets, gas fees are a big part of the process.
That is all well and good, but what are gas fees? Why does the cost change so much and how do you keep the cost down?
In todays blog we will look at gas fees and hopefully help you understand them and answer the questions above.
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What are gas fees?
To keep tings simple to start with, gas fees are charges paid to process and validate transactions on the blockchain. They have come to be most commonly associated with Ethereum, but other blockchains are also using a similar charge for processing transactions.
On the Ethereum blockchain any activity, whether you’re sending ETH to another wallet or executing a smart contract requires a small amount of computational effort. This is referred to as “gas”. You then have to pay for this “gas” in Ethereum (ETH) with the cost depending on how busy the network is at the time you are trying to make the transaction.
Gas fees serve an important role in the crypto markets. They are there to help stop spam and ensure that miners or validators (the people confirming the transactions) are rewarded for the work they are doing. When the demand on the network is high, at times during a big crypto launch or during an unexpected market dip, people are more than happy to pay more to have their transactions processed quickly. This creates almost a bidding system, similar to what you might find on eBay where the higher fees get priority over the lower fees. People opting for a lower fee may face delays or their transactions may even fail entirely.
What determines the gas fee?
There are two key factors that decide the amount of the gas fee that you’re going to have to end up paying for a transaction, the gas limit and the gas price.
The gas limit is the maximum amount of computational effort that you’re allowing for a single transaction, while the gas price is how much you are willing to pay per unit of that effort. This is usually measured in GWEI, which is a small denomination of Ethereum (ETH).
A simple example of this would be if you are trying to complete a simple ETH transfer that is going to require a gas limit of 21,000 unit and you have set the gas price at 50 GWEI, then you are going to pay 1,050,000 GWEI, which works out to 0.00105 ETH for the transaction.
During 2021, Ethereum introduced a new upgrade to the blockchain called EIP-1559. This brought in a more predictable fee structure by introducing a base fee that is burned (permanently removed from the ETH supply) and the ability to add a tip to help speed things up. This did help with making things more transparent, but it never really managed to lower the overall cost as hoped, especially when the network is experiencing high amounts of traffic and users.
How can I reduce the gas fees for my transactions?
So the big question, how do I reduce the amount of gas fees I have to pay if I am using Ethereum a lot? The biggest factor in this is timing your transactions effectively. Gas prices change based on demand on the network, that being said you will usually find that demand on the network is at its lowest during off peak hours. This often means that late at night or early in the morning in the UK, between 01:00 and 03:00 when fewer users across the world are active.
There are several handy tools to help you check gas prices such as Etherscans Gas Tracker or Gas Now that show you real-time gas prices and even go as far as recommending the best time to make a transaction.
These tools are always worth checking and can be an unvaluable tool in a traders arsenal to ensure that they are not paying more than they need to and eating away at the potential profits from a sale.
Another option is to look into using Layer 2 networks. These networks are separate blockchain layers built on top of Ethereum that handle transactions off the main chain and settle them at a later date, therefore reducing congestion and fees. Arbitrum, Optimism and zkSync are some of the most popular examples of these Layer 2 networks. Because they still operate within Ethereum, you are keeping the compatibility while having a significant reduction in fees.
Crypto Analyst‘s Final Thoughts.
Love or hate them, gas fees are a necessary part of the decentralised network. They help fund the overall infrastructure, reward validators and keep the system running in a secure manner. Although this does not mean that you have to overpay. With a bit of forward thinking and planning, using the right tools at the right times and some clear-headed decision making such as using Layer 2 you can keep your transactions effective and cost-efficient.
As the crypto space becomes more widely accepted, there is hope that the gas fees will be reduced, and less of an issue for the everyday users. Until that time, understand how they work and how to reduce them will help you get the most value out of every transaction you make on the blockchain.