What Is a Gas Fee?
A Gas Fee is a charge imposed on the users for using the Ethereum blockchain, and it also acts as an incentive for the miners governing the network. The only purpose of this fee is to fuel the miners to validate the transactions on the blockchain.
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Source: Gas Fee (wallstreetmojo.com)
The gas fee crypto depends on the computational power used by the miners in the validation process. The higher the fee, the faster the transaction is added to the block. However, if the gas limit imposed by the users is low, the miners may ignore the transaction and proceed to the next.
Table of contents
Key Takeaways
- The gas fee is the amount charged to the users for using the Ethereum blockchain. This fee acts as a reward for miners for governing and maintaining the network.
- The Ethereum blockchain works on a PoW (proof of work) mechanism where the maximum reward reaches those validators who mine faster. Thus, higher fees result in quick validation.
- Likewise, lower fees should be addressed or included by them. The calculation of this fee involves gas limit, base fee, and priority (or tip) fee.
- However, in the recent update of Ethereum 2.0, even miners with more stakes can earn high rewards.
Gas Fee In Blockchain Explained
A gas fee is a charge imposed on users for using specific blockchain networks, with Ethereum being one of the most notable examples. Unlike Bitcoin, which relies on proof of work (PoW), where miners are rewarded based on computational work, Ethereum introduced gas fees to compensate miners for processing transactions and smart contracts. When a user initiates a transaction on the Ethereum network, its verification depends on the gas price and the specified gas limit.
With the introduction of Ethereum 2.0, Ethereum is transitioning from a PoW to a proof of stake (PoS) mechanism. However, this transition doesn’t directly impact fees. The users’ willingness to pay and the network’s demand still primarily determine gas fees. Validators in Ethereum 2.0’s PoS system earn rewards through block validation but are not directly rewarded with gas fees based on their stake.
To pay gas fees on the Ethereum network, users use Ether (ETH), Ethereum’s native cryptocurrency. Users can also specify the gas price in smaller denominations called Gwei, each Gwei representing one billionth of an Ether coin.
In Ethereum, the gas limit for a transaction can vary depending on its complexity. While 21,000 gas units might be sufficient for a simple Ether transfer, more complex operations require higher gas limits.
The gas fee mechanism operates on basic economic principles of supply and demand. Increased demand for processing transactions and executing smart contracts can lead to higher gas prices, while decreased demand can result in lower fees. Users can utilize gas fee trackers to monitor these fluctuations in gas fees.
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How To Calculate?
Let us look at the formula and steps involved in it.
#1 – Determine the gas units, base fee, and tip
The first step is to estimate certain gas elements before proceeding with the formula. It includes gas units, base fee, and gas tip. The gas unit or limit refers to the maximum amount of gas a user is willing to pay. However, it does vary across different transactions. In contrast, the base fee is the minimum required to conduct a transaction.
However, this fee depends on the demand forces, not the transaction type. And lastly, a tip or priority fee acts as an extra commission to boost the transaction speed. So, if a person wants their transaction included first, they can pay a tip to the miner. As a result, the miners prioritize the tip-inclusive transaction and earn higher fees in return.
#2 – Apply the formula
Once the gas limit and price are decided, apply the formula. Let us look at it:
Gas Fee = Gas unit (limits) * (Base fee + Tip)
For example, in the Polygon network, if the user keeps a gas limit of 10000 gwei and a base fee of 200 gwei, the total polygon gas fee is 10200 gwei.
Note: Gwei is a commonly used term in the Ethereum ecosystem and stands for “gigawei.” It’s a vital unit for specifying gas prices on the Ethereum blockchain. One Ether (ETH) is equivalent to one billion Gwei. When setting one’s transaction’s gas price in Gwei, balancing paying enough to incentivize miners and keeping costs reasonable is essential.
Examples
Let us look at the examples to comprehend the concept in a better way.
Example #1
Consider Luke, who must send 200 Matic tokens to settle a debt. He sets a gas limit of 15,000 gwei and a base fee of 300 gwei, which is essential for processing. To ensure swift confirmation, he adds a 150 gwei tip. Despite a backlog of transactions, Marcus, the miner, prioritizes Luke’s payment due to the tip. Luke’s transaction might have faced delays without the tip, potentially jeopardizing the debt repayment deadline. It demonstrates how adding a tip to the gas fee can expedite transaction processing in blockchain networks.
Example #2
In September 2023, Binance faced a staggering daily expense of over $1 million worth of Ether on gas fees. This surge was primarily attributed to a wallet aggregation process initiated by the exchange. Gas prices soared from a mere $0.17 to a substantial $11.2 per transaction within 24 hours, amounting to 530 ETH.
It is crucial to note that this gas fee increase occurred amid a backdrop of heightened Ethereum network activity, with a surge in the number of addresses participating in transfers. While Binance explained that the aggregation process aimed to safeguard users’ funds, the sudden spike in fees raised questions about fee-setting processes, network scalability, and the impact on Ethereum’s demand and usage.
Market participants hoped for a reduction in gas fees to maintain Ethereum’s usability and prevent a potential drop in demand and network activity.
How To Reduce?
Sometimes, gas fees can be variably high. However, there are specific ways to reduce it. Let us look at them:
- The foremost step is to cut off the priority fee applicable to the transaction. Since the base fee and gas limit cannot be altered, the only remaining option is the tip. Thus, the gas will automatically reduce if users submit the transaction without a tip.
- Another tip is to watch the market forces and react likewise. As there is high demand (traffic) on weekdays, chances of high gas price prevail. Therefore, it is advisable to transact the trade on weekends and not weekdays.
- In addition, choosing the appropriate time is also equally important. In contrast, the whole market is busy in the daytime, from midnight to 4 a.m. [Eastern Standard Time (EST)] is less chaotic.
- Users can use the gas fee tracker to calculate the amount in advance. Likewise, utilizing gas tokens can help store gas at a lower cost. Thus, when prices are high, they can mint these coins and use them later.
Gas Fee vs Transaction Fee
Although gas and transaction fees incentivize the network, they have different functions to perform. So, let us look at their differences:
| Basis | Gas Fee | Transaction Fee |
|---|---|---|
| Meaning | It refers to the reward incentive to the miners for maintaining and governing the Ethereum blockchain. | A transaction fee is a fixed percentage applicable to every transaction. |
| Purpose | To fuel the validators to verify and process the transactions quickly. | To accurately validate and record transactions on the blockchain to prevent overflooding. |
| Formula | Gas Fee = Gas unit (limits) * (Base fee + Tip) | Transaction Fee = Gas Units Used * Price per Gas Unit |
| Blockchain | It only occurs on the Ethereum platform. | This fee can appear on any blockchain. |
Frequently Asked Questions (FAQs)
OpenSea is a cryptocurrency wallet that facilitates the trading of digital assets like NFTs (non-fungible tokens). It varies depending on transaction complexity and network congestion. It typically ranges from around $70 to $300 or 0.04 to 0.19 ETH.
Gas fees are influenced by both the complexity and size of transactions. Larger and more complex transactions may result in higher fees. The Ethereum blockchain operates on a proof-of-work mechanism and can see increased fees if miners take longer to validate transactions. Additionally, an increase in the target block size on the Ethereum network can lead to a 12.5% rise in the base fee per block.
The tax treatment depends on the nature of the crypto transaction and tax regulations in your jurisdiction. These are typically not deductible against personal income taxes. However, in particular business transactions involving Ethereum, gas fees may be considered a deductible business expense on business tax returns.
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