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What are Ethereum Gas Fees Anyways?

The term "gas" refers to the measurement used to express the amount of computational power (read more)

Peter Olawuyi
Peter OlawuyiSep 28, 2022
Wallet Infrastructure

What are Ethereum Gas Fees Anyways?

Have you ever considered why Ethereum fees are even referred to as “gas fees”? Instead of just network charges or something of that sort.

Well, “Gas” is the basic unit of computing.

The term “gas” refers to the measurement used to express the amount of computational power necessary to carry out particular activities on the Ethereum network. Either moving Ether (ETH), Ethereum’s native cryptocurrency, between addresses or minting your own NFT, or exchanging ETH for other tokens. Gas fees can only be paid for in ETH and prices are denoted in gwei, which stands for giga-wei (Gwei being the smallest denomination of ETH). A gwei is equal to 1,000,000,000 wei or 0.000000001 ETH.

Miners determine the price of gas based on supply and demand for the network’s computational power, which is required to process smart contracts and other transactions.


WHY DO GAS FEES EXIST?

In essence, gas fees contribute to the safety of the Ethereum network. To stop malicious users from spamming the network, we impose a price on each computation that is performed there. Each transaction is needed to establish a limit on how many computational steps of code execution it can use to prevent unintentional or malicious infinite loops or other computational waste.

Even if a transaction has a limit, any gas not utilized in the transaction is given back to the user.


How Do Ethereum Gas Fees Work?

The gas fees work in two ways through gas limit, and the gas price. Gas Limit is the maximum amount of gas that one is willing to pay to run a transaction while the Gas Price is the amount you willing to pay per unit of gas as a fee to the miner. The price of gas varies according to how active the Ethereum Virtual Machine is. The busier the network, the more you’ll need to pay. Setting a greater gas price (the amount you’re willing to pay per unit) makes your transaction more appealing to miners and increases the likelihood that it will be completed faster. If you set it too low, you might have to wait a while or end up with an unmined transaction.

Estimate Gas Limit

This endpoint gives information for gas expenses when sending ether to contracts or making a transaction with additional data in it.

Use it to get details such as:

  • transactions amount;
  • recipient’s address receiving the transaction;
  • and the address sending the transaction.

How Are Gas Fees Determined?

Currently, there are two fee models in use due to a recent hard fork in the Ethereum blockchain, called the London Upgrade. The upgrade was implemented in August 2021 in part to address the skyrocketing fees but also to reduce the environmental impact of Ethereum’s unsustainable energy consumption.

Pre-London Upgrade

The way transaction fees on the Ethereum network were calculated changed with the London Upgrade of August 2021. Here is a recap of how things used to work:

Let’s say Alice had to pay Bob 1 ETH. In the transaction, the gas limit is 21,000 units, and the gas price is 200 gwei.

Total fee would have been: Gas units (limit) * Gas price per unit i.e 21,000 * 200 = 4,200,000 gwei or 0.0042 ETH

When Alice sent the money, 1.0042 ETH would be deducted from Alice’s account. Bob would be credited 1.0000 ETH. Miner would receive 0.0042 ETH**.**

Post-London Upgrade

On August 5th, 2021, the London Upgrade went into effect in order to improve the predictability of transactions on Ethereum for users.

EIP-1559 introduced the concept of the base fee which represents the minimum fee that has to be paid for a transaction to be included in a block.

This base fee is set per block and can be increased or decreased, depending on how busy the network is.

When the network is at more than 50% capacity, the base fee is increased, and when it’s lower than 50% utilization, the base fee is decreased. The amount that the base fee can be increased/decreased is constrained to 12.5% per block.

This upgrade also increased the network capacity by doubling the gas limit per block from 12.5 million to 25 million gas.

Both of these changes help reduce congestion and mean that fees are easier to predict as they correspond to the information from the previous blocks.

One other important aspect EIP-1559 introduces is a miner tip which is completely separate from the base fee.

To avoid the risk of miner collusion to artificially inflate the base fee for the miner’s benefit, only the miner tip goes to the miner and the entire base fee is burned (destroyed). Hence the name of the fork…the fire of London.


Why Are Gas Fees So High Sometimes?

Ethereum gas fees can continuously spike for days when network demand exceeds the bandwidth capacity of the network. Heavy reliance on the platform fuels high levels of increase in the network’s gas fees. Other gas fee increases have been a result of the popularity of NFT collecting and investing. There are gas fee calculators that track and approximate these gas fees.

While such circumstances can be frustrating for many, these gas fee increases are designed to bring network demand back into supply-and-demand equilibrium. On the other hand, weekends and specific off-peak hours are way cheaper.

If you want to monitor gas prices, so you can send your ETH for less, you can use many different tools such as:


Who Receives Gas Fees?

Gas fees go to those who support and secure the Ethereum network. Gas fee payouts on Ethereum’s execution layer (previously known as Ethereum 1.0) go to Ethereum protocol Proof-of-Work (PoW) miners. Gas fees are distributed to those staking ETH on Ethereum’s consensus layer (formerly known as Ethereum 2.0) to support this updated Proof-of-Stake (PoS) variation of Ethereum.


Efforts made by Ethereum to lower gas fees

With The Merge, Ethereum plans to permanently fix some of the gas fee issues, Ethereum is working on upgrades, which will allow the network to scale globally and perform thousands of transactions per second.

You can also save costs on transaction fees with Bitpowr gas station. It allows users to automatically fund their smartchain wallet addresses (such as ethereum, matic, tron, and other EVM family) with a predetermined amount that will be used to pay for gas fees when performing transactions.

To learn more, contact us or send us an email to [email protected].

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